Here's Why Investors Should Steer Clear of iRobot (IRBT)

iRobot Corporation IRBT seems to have lost its sheen to the ongoing trade war between the United States and China, adverse impacts high promotional activities, and other factors.
 
The manufacturer of industrial robots currently has a market capitalization of $1.3 billion and a Zacks Rank #4 (Sell). It belongs to the Zacks Industrial Automation and Robotics industry, currently at the bottom 13% (with the rank of 221) of more than 250 Zacks industries.

Notably, iRobot’s third-quarter 2019 results were better than expected, with earnings surpassing estimates by 129.6%. Despite the impressive results, investors have a cautious stance for the stock. Over the past three months, the company’s shares have declined 28.4% against the industry’s growth of 22.1%.

Factors Impacting iRobot’s Investment Appeal

Tariff Woes: The company has been suffering from adverse impacts of the trade tensions between the United States and China for the past few quarters. Notably, its third-quarter 2019 margins were hurt by the U.S.-imposed tariffs on robotic vacuum cleaners manufactured in Beijing.

iRobot fears that higher tariff rate of 25% announced in May 2019 versus 10% implemented in September 2018 might put an extra burden on its costs and subsequently, prove detrimental to its margins. The company expects to incur tariff-related costs of $35-$40 million in 2019.

Promotional Activities: iRobot invests considerably in the promotion of products or resorts to pricing actions to fend off competitive pressures. However, such activities are concerning and can hurt margins. Notably, its gross margin suffered from adverse impacts of promotional activities and reduced product prices in the third quarter of 2019.

The company believes that promotional activities, tariffs and pricing actions will continue hurting gross margin in the fourth quarter as well.

Weak Projections: The above-mentioned headwinds have made iRobot wary about the rest of 2019. It expects earnings of $2.60-$2.80 for 2019 versus $2.40-$3.15 stated earlier. The mid-point of the revised guidance is $2.70, down from earlier $2.78. It now anticipates revenues of $1.2-$1.21 billion, down from previously mentioned $1.2-$1.25 billion.

The company expects gross margin of 45% for the year, at the low-end of previously mentioned 45-46%, and anticipates operating income of $75-$80 million, down from $75-$100 million mentioned earlier.

Bottom-Line Estimate Trend: The Zacks Consensus Estimate for iRobot’s earnings has been lowered in the past 60 days. The consensus estimate for earnings per share is currently pegged at $2.67 for 2019 and $1.39 for 2020, reflecting declines of 2.2% and 56.8%, respectively, from the 60-day-ago figures.

Also, earnings estimates for fourth-quarter 2019 and first-quarter 2020 were declined 61.5% to 40 cents and 38.4% to 45 cents from the respective 60-day-ago figures.

iRobot Corporation Price and Consensus

iRobot Corporation Price and Consensus

iRobot Corporation price-consensus-chart | iRobot Corporation Quote

Stocks to Consider

Some better-ranked stocks in the Zacks Industrial Products sector are Tennant Company TNC, Dover Corporation DOV and Standex International Corporation SXI. While Tennant currently sports a Zacks Rank #1 (Strong Buy), Dover and Standex carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for Tennant and Dover have improved for the current year while remained unchanged for Standex. Further, positive earnings surprise for the last reported quarter was 40% for Tennant, 4.58% for Dover and 2.11% for Standex.

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