IRobot share-price fears are exaggerated

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Looks like Bedford-based iRobot Corp., maker of the iconic Roomba robotic vacuum cleaner (above at left) and other consumer products (including the Braava floor-washer, at right), was stricken by a case of the shorts Tuesday.

As described by Motley Fool (http://bit.ly/2ufqcdp), noted short-seller Spruce Point Capital announced it has “re-established” its short position in iRobot, updating a report from three years ago in which it stated the stock could face downside risk of up to 50 percent (Aside: Given that shares have risen 150 percent in just the last year alone, they will have to fall a whole lot more than even 50 percent to allow for that prediction to come to fruition.)    

But somebody took the announcement to heart, as iRobot shares were clipped by more than 10 percent on Tuesday, closing at $90.65.

Spruce’s argument doesn’t sound all that strong to this amateur observer. It notes that iRobot benefited from a restocking of its supply chain, the annexation of its struggling defense business (remember the PackBot, of Afghanistan cave-searching fame?) and its acquisition of a Japanese distributor, all of which will make year-over-year comparisons tougher.

Well, perhaps. And certainly the past year’s 150 percent gain screams for some sort of pullback. But I’m not sure that, over the long  term, iRobot’s story isn’t still compelling.     

As the Motley Fool story also points out, Spruce is also concerned with “disruptive competition” coming to the U.S. market — in other words, more robot makers.

It says here, though, that being first matters, especially if you’ve got a good product. And iRobot was first (at least first to dominate the consumer robot market), and its 88 percent share of the robotic vacuum space speak volumes for its strength, and provides it a huge advantage going forward.

Second, the Asia opportunity is simply huge. China and India together have about eight times as many people as does the U.S., and as households form and modernize, iRobot’s first-in strategy is bound to pay dividends (or at least generate sales).

Valuation? OK, in some respects iRobot’s current share price is pretty rich. It currently represents 54 times expected 2017 earnings. But according to analysts covered by Yahoo Finance, iRobot is expected to post earnings of $1.67 per share this year and $2.54 next. While that 2018 number is still about 35 times earnings, given Tuesday’s closing price, the year-over-year earnings growth would be more than 50 times, which would seem to provide some justification for the lofty multiple.     

Tuesday’s closing price also represents 3.5 times sales, which is not an outrageous number for wide-moat technology company. I like sales ratios better because, while earnings can be jerked around, sales are sales. What you see is what you get.

I’m not sure I’d buy iRobot now — maybe a nibble just to get in for the long term. The pullback fears are real, but I see them as temporary. But if I already owned shares (I don’t), I wouldn’t be quick to head for the exits.

  

TRC shareholders OK $554M deal

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Shareholders of TRC Companies Inc., an engineering, environmental consulting and construction-management firm based in Lowell’s Wannalancit Mills, have approved the definitive merger agreement with affiliates of New Mountain Partners IV, L.P.

Long-story-short, the approval means TRC will become privately held.

The deal, which was originally announced on March 31, calls for affiliates of New Mountain to pay TRC shareholders a total of $554 million, or $17.55 per share in cash.

Shares of TRC closed Thursday at $17.50, unchanged, in light trading.

The transaction is expected to be complete by month’s end, according to TRC. It leaves the Mill City with four publicly-traded companies — M/A-Com Technology Solutions Inc., Enterprise Bank, CSP Inc. and SoftTech Inc.  

TRC posted revenues of $481 million in its most recent fiscal year, which ended in June 2016.

Cisco’s Reinvention

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Remember when California-based networking giant Cisco Systems was buying up companies in Greater Lowell and beyond? It was the networking boom of the late ’90s and early aughts, and Cisco was the biggest player, snapping up startups in its effort to build the biggest and baddest infrastructure for the sake of internet commerce. In 1999 alone, Cisco, then run by former Wang Labs executive John Chambers, bought 16(!) companies, including the $2 billion purchase of Lowell-based GeoTel. A year later, in what has to be considered a poster-boy moment of the insanity that was stock currency at the time, Cisco agreed to shell out $5.7 billion in stock (not a misprint) for Acton-based ArrowPoint Communications. Indeed, if Cisco didn’t create the technology itself, it would just buy whoever did.

Eventually, Cisco took all those Greater Lowell companies it acquired and planted them into one big campus off I-495 in Boxboro. It’s still there, and the company still houses more than 1,000 employees there (I think).

Well, the networking boom went bust, and while Cisco remained a big player in internet infrastructure technologies, sexier names (Apple, Google, et. al.) took over media attention in Tech Land.

But would you believe…. Cisco may now be considered a prudent choice for dividend investors? It’s true. Cisco, which didn’t pay a dividend at all until six years ago, has quietly ramped up its quarterly payout to the point at which it’s… well, rather competitive.

Earlier this year, the company announced that it was hiking its quarterly dividend from 26 cents per share to 29 cents. That comes to $1.16 annually, which is yield of 3.65 percent, based on Monday’s closing price of $31.76.

Hey, that’s not bad at all.

As you might guess, Cisco is not a big grower anymore. Its expected revenues for the year ending July 31 are somewhere around $47.9 billion, which would actually be a touch lower from the previous two years, both of which were above $49 billion. But thanks to consistent cost-cutting (hence my lack of certainty over Boxboro headcount), Cisco is expected to have a net profit this year of $2.38 per share, according to the average of 30 analysts covered by Yahoo Finance. Thus, Monday’s closing price comes to just 13.3 times earnings.   

Continuing the dividend shouldn’t be an issue, given that earnings remain about double the payout on a per-share basis.  

No, Cisco’s stock isn’t doubling in two years anymore (and then crashing back to Earth at some indeterminate time afterward). But it’s not sitting still either. In addition to continuing to command a large share of the networking space, the company has added other newer technologies, such as cloud services and cybersecurity, to its offerings.

Indeed, this one-time hare may have become a something of a tortoise. But it just might win the race.