Imagine that you are the CEO of a public company and your stock is trading near an all-time high. You announce good year-end earnings and are optimistic about the future. And then your world collapses. Due to government cutbacks, your 2012 revenues for your defense and security business will be substantially less than what they were a year earlier. Your stock drops 33% the next day and continues to slide over the next four months. That's exactly what happened to Colin Angle, CEO of iRobot (Nasdaq:IRBT), maker of the tremendously successful Roomba home vacuum. Its stock now trades below its November 2005 IPO price of $24.

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The Good Stuff
Forget the defense and security business for a moment (we'll get back to it shortly) and instead let's focus on its home robots. In the first quarter, its revenue grew 20% YOY to $81.6 million. Its gross margin was only marginally weaker at 45.3%. For all of 2012, it expects home robots to account for 75% of its overall revenue somewhere between $345 million and $355 million. The acceptance of the Roomba and the rest of its products are much more pronounced internationally, which accounted for 73% of the home robot segment's revenues in the first quarter.

According to the company, strong markers include Spain, Japan, Italy, Denmark and Russia. The emerging markets are also experiencing rapid growth, although on a much smaller scale. In addition to the Roomba, its Scooba 230, which washes floors robotically, is also doing well. Outdoors, it has two new products: the first is the Verro, which cleans your pool, and the second is the Looj, which can clean a 60-foot section of gutter in just 10 minutes. Not everyone who owns a house owns a pool, but mostly everyone who owns a home has gutters. It might take a while for this product to catch on, but it could be a sleeper for the company. With an increased marketing campaign to grow sales here, the future is bright for home robotics.

SEE: Take Control With Investing Absolutes

The Bad Stuff
As I mentioned in the opening paragraph, its defense and security segment is currently suffering from funding delays in the federal government. As a result, its first quarter revenues were $16.2 million, 58% less than in the same quarter in 2011. With gross margins that are lower than home robots at the best of times, the fallout was an operating loss for the segment and a severe haircut for the entire company. Its overall operating profit in Q1 was $677,000, compared to $11.4 million last year.

Looking out for the remainder of 2012, it expects revenues in this segment to drop by 20% in 2012. This caused its stock to drop on the news. Angle had this to say about it, "I'm disappointed about the market reaction, but we have to tell it like it is. This guidance is appropriate given the level of uncertainty we have, and we cannot say we will perform better than other defense contractors." There's no way to sugarcoat it so why bother. The reality is that business in the second half of the year should pick up enough new sales to break-even on an operating basis. Angle finished his remarks in the first quarter conference call by saying it exceeded its expectations for the quarter. By focusing more of its attention on commercial business rather than government contracts, the long-term prognosis is good.

SEE: Equity Valuation In Good Times And Bad

Share Price
As I mentioned earlier, its stock is trading below its $24 IPO price. At the time of its IPO in late 2005, it was valued at a market cap of $559 million. Its revenues in 2004 were $95 million, with net earnings of $219,000. In its first quarter press release, it said revenues for 2012 would be at least $465 million, with net earnings of $21 million, about half those in 2011. Despite the step backwards by its defense and security division, its net earnings will be the third highest in its history. It's considerably stronger financially than it was back in 2005, with $6.63 in cash per share and no debt. It won't have any problems riding out this hiccup.

iRobot and Peers

Company

iRobot

7.57

Northrop Grumman (NYSE:NOC)

4.45

Lockheed Martin (NYSE:LMT)

6.18

General Dynamics (NYSE:GD)

5.51

Teledyne (NYSE:TDY)

8.81

SEE: Relative Valuation Of Stocks Can be A Trap

The Bottom Line
When I last wrote about iRobot in May 2010, its stock was about where it is today in the low 20s. However, back then it was expensive. Now it's priced to move.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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