The stock of iRobot (NAS:IRBT, 30-year Financials) appears to be modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $97.55 per share and the market cap of $2.7 billion, iRobot stock shows every sign of being modestly undervalued. GF Value for iRobot is shown in the chart below.
Because iRobot is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 17.6% over the past five years.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. iRobot has a cash-to-debt ratio of 9.11, which ranks better than 76% of the companies in Hardware industry. Based on this, GuruFocus ranks iRobot's financial strength as 7 out of 10, suggesting fair balance sheet. This is the debt and cash of iRobot over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. iRobot has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $1.5 billion and earnings of $6.06 a share. Its operating margin is 11.22%, which ranks better than 77% of the companies in Hardware industry. Overall, the profitability of iRobot is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of iRobot over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. iRobot's 3-year average revenue growth rate is better than 88% of the companies in Hardware industry. iRobot's 3-year average EBITDA growth rate is 22.8%, which ranks better than 76% of the companies in Hardware industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, iRobot's ROIC was 29.48, while its WACC came in at 8.63. The historical ROIC vs WACC comparison of iRobot is shown below:
In short, The stock of iRobot (NAS:IRBT, 30-year Financials) is estimated to be modestly undervalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 76% of the companies in Hardware industry. To learn more about iRobot stock, you can check out its 30-year Financials here.
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