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Bear of the Day: iRobot (IRBT)

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iRobot (IRBT - Free Report) became a Zacks #5 Rank (Strong Sell) in late July at $75 after a disappointing Q2 report propelled Wall Street analysts to lower growth estimates.
 
My colleague Ben Rains published an article on July 31 describing the growth slide...
 
Quick Q2 Recap
 
The Bedford, Massachusetts-based company posted earnings of $0.25 a share. This crushed our $0.03 a share Zacks Consensus Estimate, but it did mark a significant downturn from the year-ago period’s EPS of $0.37. Meanwhile, iRobot’s sales climbed roughly 15% to $260.2 million, which fell just short of our projection.
 
iRobot Overview
 
The reason for iRobot’s decline stems from the firm’s exposure to the U.S. and China trade war. Last quarter, the robotic vacuum maker said that it would slowly move production of some of its “more easy to build products” outside of China to help fight tariffs worries. Executives claimed that the efforts would help iRobot create better long-term supply chain flexibility.
 
But Wall Street doesn’t seem satisfied yet. And this disappointment comes with good reason, since the firm lowered its 2019 guidance on the back of trade-related setbacks. “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,” the company wrote in prepared remarks last week.
 
(end of Ben Rains July 31 excerpt)
 
Ben went on to elaborate about company guidance that did not paint a compelling picture, and literally only compelled analysts to revise their models downward.
 
iRobot executives lowered their revenue outlook from between $1.28 billion and $1.31 billion down to the $1.20 to $1.25 billion range. Meanwhile, the company dropped its earnings guidance from between $3.15 to $3.40 a share this year to anywhere between $2.40 and $3.15.
 
This guidance in July cause the Zacks Consensus EPS Estimate for the firm’s Q3 earnings to tumble over 48% to $0.58 per share on the back of a 1.4% sales decline that would see it hit $260.8 million. The company’s full-year fiscal 2019 EPS figure was then projected to fall by a similar 48% to reach $2.73 a share.
 
Sweeping Up Q3 Results
 
Before I share what IRBT reported on Tuesday October 22, let me make this perfectly clear...
 
From late July to October 22, IRBT shares fell over 25% -- from $75 to under $55 -- as estimates came down and the Zacks Rank told you "Don't buy, don't buy!"
 
And tonight, while they delivered more growth -- and IRBT remained a Zacks #5 Rank because of newly falling estimates before the report -- a decidedly muted outlook for 2020 hit like a brick vacuum.
 
iRobot reported a giant earnings beat of $1.24 vs $0.54 and 9% growth in Q3 revenues to $289.4 million on strong international performance, surpassing the consensus estimate of $259.4 million, which still represented a year-over-year decline.
 
Even as revenues declined 7% in the US, this was offset by a 40% growth in Japan and 27% growth in emerging markets/EMEA.
 
But more importantly, management narrowed its outlook on 2019 revenue and operating income. The company currently expects revenues for the full year in the range of $1.2-1.21 billion and operating income in the range of $75-80 million.
 
Meanwhile, the guidance on full year EPS was narrowed to $2.60 to 2.80, from the prior estimate of $2.40 to $3.15.
 
In after-hours trading, as I type this on the evening of October 22, this quarterly report and outlook saw IRBT shares reacting down nearly 18% to $44.
 
Bottom line: The Zacks Rank warned investors in late July at $75 that more pain was on the horizon for IRBT. This week's results and price action could change that outlook, but the stock -- and analyst models -- will likely need time to heal before it's time to jump back on board. The Zacks Rank will let you know.
 
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