If you're on the lookout for the next blue chip stock, give iRobot (NASDAQ:IRBT) some consideration. There's no standard definition for blue chips, but iRobot certainly meets some of the criteria many people would suggest. Let's run the company through a few of them and see how it fares:
Track record of performance over time
First off, iRobot is a young company, founded in 1990 by roboticists at the Massachusetts Institute of Technology, and has been public for less than a decade. It therefore doesn't have the longest track record.
Still, it has earned a market capitalization of nearly $1 billion and sports a nice breadth of operations. Its consumer-oriented offerings include the famous Roomba vacuuming robot, the Scooba floor scrubber, the Braava floor mopper, the Mirra pool cleaner, and the Looj gutter cleaner. It also serves the defense and security sectors, with robots tackling duties such as surveillance, hazardous material handling, and even bomb disposal.
One of iRobot's latest developments is its mobile Ava 500 videoconferencing robot, which facilitates collaboration. The commercial arena also holds a lot of potential. iRobot's RP-VITA telemedicine technology, for example, facilitates physicians conducting their activities remotely from their patients. iRobot's stock has been good to shareholders, averaging annual gains of more than 20% over the past five years. If it keeps up its strong performance, it could well be a blue chip stock in the future.
Solid balance sheet
iRobot's balance sheet is solid, with cash and short-term investments more than doubling over the past four years and no long-term debt. Its cash pile totals $183 million as of the company's second quarter of 2014, and it is free cash flow positive, meaning (unlike many other young companies) it's not burning cash.
Strong financial health is critical for a would-be blue chip, as it permits the company to keep investing in itself, fight competitors and market downturns, and at some point offer a dividend.
Strong revenue growth and cash flow generation
All is not completely rosy at iRobot, though. Revenue and earnings, which respectively have averaged annual growth of about 10% and 35% over the past five years, took a hit after its second-quarter earnings were reported, when defense sales weakened in an environment of military belt-tightening. Lest it end up too dependent on the Pentagon, the company is focusing more intently on building its non-defense businesses.
Still, iRobot's top line generally has been growing, and its bottom line remains well in the black. Meanwhile, the company has many irons in the fire, targeting consumers and various industries. As the housing market recovers and gains steam, sales of home-cleaning bots should get a sales boost, too. A strong jump in research and development spending in the past two years also bodes well for future growth, as does international expansion into markets such as China.
And now we come to dividends, which typical blue chip stocks offer. iRobot doesn't, though, and it's not likely to introduce them anytime soon. That's because young and rapidly growing companies generally need to plow their excess cash back into the business, fueling further growth. Once they start running out of other, more productive, ways to use their cash, and once management feels confident it can consistently afford the payout, a dividend might be initiated.
Shareholders aren't out of luck today, though. Along with stock price appreciation, iRobot can still reward them via share buybacks, without committing to a dividend. And it's doing so, having in April announced authorization to buy back up to $50 million worth of shares over the coming year. Sometimes companies use buybacks to offset stock dilution due to stock-based compensation, but iRobot has kept that in check, with its share count rising only 15% between 2006 and now.
Meanwhile, iRobot's valuation looks reasonable, so the company shouldn't be destroying value by buying shares near current levels. Its current and forward-looking P/E ratios, roughly 38 and 22, respectively, are both well below the company's five-year average of 50. The stock is depressed in part due to lower expected Pentagon spending, but its defense business generates less than 10% of company revenue and sports a strong backlog, so the situation is really not that dire. Meanwhile, the company is innovating and introducing new products and is poised to profit as the housing market rebounds.
Yea or nay?
Some dictionary definitions for the term "blue chip" state the stock must be of the highest quality and reliable. In other words, investments in blue chip stocks should help you sleep at night. Despite all that iRobot has accomplished, and all its potential, it fails on this last rather critical metric. It is operating in an environment that changes rapidly, and its future is far from certain, though management's execution so far inspires plenty of confidence.
This is a company that risk-takers might consider investing in, while those seeking more stable stocks might want to at least keep an eye on its progress.
Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns shares of iRobot. The Motley Fool recommends iRobot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.