New York, May 8, 2011 - In this dicey market, I can't say what's going to happen day by day. But I believe strongly that at today's price, the market undervalues robotics maker iRobot (Nasdaq: IRBT). Their marquee business is robots for the U.S. military and our allies. Peaceful robots that do amazing tasks like disarm IEDs and see around corners.
The stock peaked recently close to $39. Since then it's been sucked up in the overall downturn / pause in the buying. The latest news, besides a good quarter in earnings, was a $230M Navy contract spread out over the next 3 or 4 years which popped the stock significantly. That 230 is sales, not profit, so I'm comparing apples to oranges when I say that the market cap of $870M (at the time of this writing) seems understated.
Within the defense community, iRobot has an unparalleled reputation. The PackBot robots have saved dozens of lives, if not hundreds. I'm not talking about "brand loyalty" when I say that iRobot has a good rep. I'm saying their products work in ways that are so critical, the buyer would never think to stray because the stakes are too high.
So I will freely admit I don't understand the day-to-day gyrations of the market, but I do feel that iRobot is headed up, to a valuation of $1B, which would be indicated by a share price of $38.46.
If you want to trade this with options, the June $35s are the right way. This article being written on a Sunday night, the last ask price for a June 35 call was 1.45 per contract. If the stock does close at 38.46 at some point before June 17, the intrinsic value of each of those contracts would be 3.46, or a 138% gain. If it tops 40, a 244% gain or more.
The Bin Laden story raised attention to the transition the military will have to make in coming years to a more passive military. Our rationales for war are increasingly vindicated / played out. So we will have to withdraw. But some troops will certainly remain in Afghanistan - and Iraq - for years to come. The chances are, our military will move increasingly to robots as opposed to people, as concerns about the debt and deficit cause hard decisions in Washington. The military will get smaller. And in the process, tactical robots will get bigger.
Disclosure: I own calls in the security mentioned, iRobot. This is just the natural order of things. I write about the real world stocks I am involved in.