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iRobot (IRBT) Battles Cost Woes on Solid Growth Drivers

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We issued an updated research report on premium consumer electronics company, iRobot Corporation (IRBT - Free Report) on Jul 2. The company currently carries a Zacks Rank #3 (Hold).

Over the past 60 days, the Zacks Consensus Estimate for the stock’s earnings remained changed for both 2018 and 2019 at $2.36 and $2.91 respectively, reflecting neutral brokers’ sentiments.

Let’s dig into the fundamental aspects influencing the performance of the stock.

Existing Growth Drivers

Stronger demand for home-robotic products like Roomba, Scooba, Braava has been boosting iRobot’s revenues for the past few quarters. The company’s revenues improved 3.3% in 2016, while the same increased 10.9% in 2017. Notably, in first-quarter 2018, the company’s top line improved 28.8% year over year, backed by double-digit revenue growth secured from all end-markets.

In order to increase household adoption rates of Roomba and Braava products, iRobot is investing in several marketing programs. Notably, the company is currently promoting Braava products to its U.S. Roomba customers via television advertisements. These commercials aided in bolstering the company’s U.S. Braava revenues by nearly 35% year over year in the first quarter.

Also, the $141-million Robopolis acquisition (July 2017) will likely augment the market penetration rate of iRobot’s robotic vacuum cleaners in Europe.

iRobot currently anticipates to report revenues of $1.05-$1.08 billion in 2018, estimating an annualized growth rate of 19-22%.

iRobot’s year-over-year gross profit growth was 12% and 3.4% in 2017 and 2016, respectively. Notably, gross margin expanded 150 basis points in the first quarter this year. The company expects that higher revenues, greater operational efficacy and reduced corporate tax rates will boost its profitability, moving ahead. At present, iRobot projects 2018 earnings at $2.15-$2.40 per share, higher than the previous view of $2.10-$2.35 per share.

Over the past three months, iRobot’s shares have rallied 15.7%, as against the 2.6% loss recorded by the industry.



Causes of Concern

Rising cost of sales has been a major cause of concern for iRobot for the past two years, as evident from the 32.1% and 4.1% year-over-year jump registered in 2017 and 2016, respectively. In the first quarter of 2018, the company’s cost of revenues flared up 24.8% year over year. Also, total operating expenses shot up 37.6% year over year. Increased marketing and overhead expenses, and higher legal fee associated with International Trade Commission (ITC) litigation have been escalating iRobot’s costs, of late. The company expects that these issues will continue to escalate its expenses in the near term.

Additionally, excessive business rivalry in the U.S. robotic vacuum cleaning market might hurt iRobot’s revenues in the upcoming quarters. On a P/E (TTM) basis, the stock looks overvalued compared with the industry, with the respective tallies of 36.6x and 22.5x, for the past three-month period.

Stocks to Consider

Some better-ranked stocks in the Zacks Industrial Products sector are listed below:

Acco Brands Corporation (ACCO - Free Report) carries a Zacks Rank #2 (Buy). The company pulled off an average positive earnings surprise of 11.06%, over the last four quarters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Altra Industrial Motion Corp. (AIMC - Free Report) also holds a Zacks Rank of 2. The company recorded an average positive earnings surprise of 5.06%, in the preceding four quarters.

A. O. Smith Corporation (AOS - Free Report) , another Zacks #2 Ranked company, came up with an average positive earnings surprise of 3.12% during the same time frame.

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