Automation has become a huge investment sector due to its time-saving and force-multiplying attributes. Unfortunately, that didn’t help iRobot (NASDAQ:IRBT) last year, where IRBT stock dropped more than 38%. And with the company’s upcoming fourth quarter of 2019 earnings report — scheduled for release after the bell on Wednesday — this understandably leaves many investors skeptical.
As you may know, the overwhelming headwind for iRobot is the U.S.-China trade war. Although the two sides recently signed a phase one trade deal, the acrimony was too lengthy for iRobot. When sharp rhetoric resulted in rising tariffs — especially for robotics-related products — it took the wind out of the company’s sails. Back in July of 2019, iRobot CEO Colin Angle stated:
“Although we achieved our U.S. revenue target in the second quarter, we believe that the direct and indirect impacts of the ongoing U.S.-China trade war and the recently implemented 25% tariffs are likely to constrain U.S. market segment growth in the second half of the year below our expectations at the start of 2019.”
That’s not what any investor wants to hear. Not surprisingly, IRBT stock plummeted following its Q2 earnings report. The immense magnitude of volatility didn’t follow until late November. But with shares finding some support around the $45 level, the price action may appeal to contrarians.
First, though, let’s discuss what we might see in Q4 2019.
China Again Clouds Narrative for IRBT Stock
Covering analysts expect iRobot’s earnings per share to come in at 42 cents. This is near the lower end of the estimate spectrum, which ranges from 33 cents to 51 cents. It’s also a far cry from the year-ago quarter, where the company delivered EPS of 88 cents. This metric easily exceeded the consensus target of 50 cents.
On the revenue front, analysts are forecasting $415.5 million. Individual estimates range from $412.8 million to $420.3 million. One positive, at least on paper, is the favorable comparison. In Q4 2018, iRobot rang up $384.7 million, against forecast range between $377 million and $395 million.
Assuming a similar Q4 seasonality boost, iRobot should be able to exceed the consensus top-line sales target. Given the reduced expectations for EPS, I think it’s also possible that the consumer tech firm could positively surprise.
However, the dark cloud again is China, specifically the coronavirus outbreak. Despite reassurances from bull market proponents that the coronavirus, like the SARS epidemic, will fade, recent updates imply pessimism. For example, The New York Times recently declared that the “death toll from the new coronavirus has exceeded that of the severe acute respiratory syndrome outbreak in 2002 and 2003 in mainland China.”
Obviously, this has tragic consequences for those affected by the disease. While I regret bringing this up, we can’t ignore it: The greater the coronavirus’ human toll, the worse its economic impact.
Right now people are more focused on shielding themselves from the outbreak. That will more likely bolster 3M’s (NYSE:MMM) protective mask business than iRobot’s Roomba vacuum cleaner.
Therefore, even if iRobot produced a strong earnings beat, its stock faces volatility risk from poor broader sentiment. Still, in the long run, shares might offer an attractive entry point.
A Compelling Price
Admittedly, I wasn’t the biggest fan of IRBT stock in the past. But two things have forced me to reconsider: growing need for automated products and a very tempting price point.
At time of writing, shares are just under $47. That places IRBT stock around late-2016 territory, right before it went berserk. You’ll recall that a few times between early 2017 to mid-2019, IRBT hit triple digits on several occasions.
Looking back in retrospect, it did so because of fundamentally sound factors. For one, consumers had more money in their pocket thanks in large part to multi-year record low unemployment. Second, Americans are simply overworked.
According to data compiled by TheNation.com, American workers are sleeping less and clocking in more hours than their counterparts of generations ago. This and several other reasons — including societal shifts — combine to make housework a truly onerous liability.
This wasn’t possible to remedy in a weak consumer market. But with more money in workers’ hands, people can afford to buy household goods. If it saves them a few hours every week, it’s probably worth it.
Yes, I’ll admit that the China headwind is very ugly for IRBT stock in the nearer term. But with shares holding support ahead of longer-term tailwinds, I’m just as well enticed.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.