Heidi gives up
iRobot Corp.
Less Favorable 1H07, Poor
Visibility = “Show Me” Stock,
Tempering Rating, PT
What's Changed
Rating Overweight-V to Equal-weight-V
Price Target $38.00 to $20.00
2007E EPS adj. for cons. From $0.53 to $0.10
2008E EPS adj. for cons. From $0.85 to $0.30
2009E EPS adj. for cons. Introducing $0.60
Key Points
1H07 Negative Sentiment Apt To Persist: 1H
Losses, Roomba Demand Debate, Strong Defense
Demand But Timing Tough To Peg – Stock Apt To
Bounce Back But Not Apt To Develop Momentum
Until Clouds Clear
Outlook Set To Improve 2H07-2008, But We’re Not
100% Confident – Management Plans Improving
Profits, Strong New Product Introduction 2H07,
Ramping Defense – Misses In Past Give Us Room
For Doubt
Trimming 2007-08 EPS, Revised PT to $20
Maintaining Attractive View for Aerospace/Defense:
The commercial aerospace cycle appears poised for a
prolonged upcycle, with a peak occurring sometime
after 2011, which suggests midcycle valuation persists,
& thus attractive upside potential for the group.
Plateauing defense budget, consistent strong free cash
flow, pricing power and reasonable valuations points to
additional upside for defense.
Investment Case
Summary & Conclusions
We’re reducing our rating on IRBT to a Equal-weight-V from
Overweight-V, which better defines the heightened risk and
reduced visibility and may take the stock down further to
Underweight if visibility/execution does not improve. The
first public pure play in robotics, IRBT retains formidable
intellectual property and has an entrepreneurial, energetic
management team, but important missteps atop reduced
visibility and planned losses in 1H07 has placed this stock in
the “show me” category. .
IRBT is the worst performing stock in our coverage universe,
down 15% YTD vs. aerospace/defense average +9% atop
2006, which also significantly underperformed.
Management guidance for a tough 1H07 after significant
insider selling all but ensures enduring skepticism and 2H07
will be an important challenge and milestone to prove the
new product introductions can significantly improve outlook.
We continue to be enthused with the defense portion of the
story, however investors remain keyed to the home robot
angle which has been mixed. Thus our Equal-weight-V
rating better defines a stock as ‘buyable’ for those with a
strong stomach for risk as an 18-month time horizon, as the
defense portion of the business is apt to continue to be the
frontline story.
With tempered growth outlook for a top-line growth story,
IRBT warrants a reduced valuation vs. prior thinking.
Lacking comps and performance to warrant a “high tech
defense” multiple, we evaluated valuation from a sum of the
parts analysis, using retail product multiples on the home
robot portion of the business and high tech defense
multiples on the defense business, which pointed to a stock
worth $20 or higher in the next 12-18 months. Assuming
management executes on plan, this represents attractive
return, but we are have moved to an Equal-weight-V rating
to highlight the greater risk in achievement than in our
Overweights with similar potential stock upside.
Potential triggers on the stock include possible strong June
selling season and planned strong 2H07 including new
product introduction, new retail stores for Scooba, growing
international penetration, LRIP on R-Gator, ramp up in
Warrior for 2008. Planned turn in profitability starting in
2H07 will be an important step. |
