IRobot's Growth Engine Intact, but Shares Overpriced
Despite the crowded competitive landscape, we expect strong domestic growth to continue for this narrow-moat firm, with only 10% of households owning a vacuum robot.
iRobot’s (IRBT) fiscal 2016 was broadly in line with our forecasts, with normalised revenue up by 17% year over year, after adjusting for the disposal of the defense and security business. Revenue growth was volume-driven, with the average selling price down just shy of 1%, and the company sold 21% more consumer robots in 2016 than in 2015. Pricing and growth trends remain strong, considering that the market is in a phase of increasing competition, with iRobot’s global market share of vacuum robots around 60%, down from 90% in 2009. The overall EBIT margin remained subdued at just over 8%. We retain our narrow moat rating. After adjusting for the results and for the time value of money, we expect to increase our fair value estimate by around 5%.
The company executed a cost-cutting program in 2016, and the consumer gross margin improved by 100 basis points. We anticipate further improvement in 2017, which should lead to modest group EBIT margin expansion. The company has taken initiatives to improve international growth by acquiring its distributor in Japan and making changes to its distribution process in China. We think this will lead to better growth in 2017 for the international segment. Despite the crowded competitive landscape, we expect strong domestic growth to continue, as the market remains underpenetrated, with only 10% of households owning a vacuum robot. We are more sceptical about the company’s ability to replicate the success of the vacuum robot with its more recently launched mopping robot, Braava, but this remains a small part of the company’s volume.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Denise Molina does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.