iRobot Corporation Seems Pretty Pleased With Itself. Should It Be?

"iRobot First-Quarter Financial Results Exceed Expectations."

So wrote iRobot in the headline for its Q1 2015 earnings releaseTuesday, before proceeding to regale investors with its accomplishments:

Sales up 3.3% for the quarter, versus year-ago numbers.
Net income down 9.4% year over year.
Profits per diluted share down 11.1%.
Meanwhile, iRobot cut a dime off its top prediction for full-year profit, and now says 2015 earnings per share should fall somewhere between $1.25 and $1.35.

This, according to iRobot, qualifies as "exceeding expectations."

The power of low expectations And maybe it does -- technically. After all, analysts at Zacks Equity Research, for example, say that iRobot's numbers were all above what it had estimated for the company, pre-earnings. Profits in particular exceeded Zacks' estimates by 45.5%.

Also, gross margins at the company did expand modestly, inching up 20 basis points to 45.5%. And free cash flow was positive in Q1 ($3.3 million), a big improvement over last year's Q1 cash burn of $9.9 million.

So it's not all bad news. But even so, it's hard to avoid the impression that things are not going great at iRobot. While the company boasted of growing Defense & Security sales by 17% in Q1, D&S is by far the less profitable of iRobot's two main business divisions, earning gross margins of just 33.2%. And while management predicts that Home Robots (the more profitable division) will grow sales by "11-13%" this year, it's predicating this estimate on "growth in the United States and China."

To put that in context, international Home Robot sales eked out only a 5% gain in Q1, while domestic Home Robot sales... declined.

ValuationNow let's put all of the above in the context of how much iRobot costs. Over the past 12 months, iRobot has earned $37.3 million in net profits, and generated $40.1 million in positive free cash flow. That's a good ratio -- we love it when free cash flow exceeds the "net income" number that Wall Street tends to fixate on.

But even so, these accounting and cash profits leave iRobot stock selling for 26 times earnings today, and more than 24 times free cash flow. So even if management delivers on its promise of "11-13%" in 2015, that seems a pricey valuation. And longer-term, analysts who follow the company are hoping iRobot can achieve and maintain a growth rate of at least 13% -- which again seems too slow to support the P/E ratio.

Long story short? I'd probably rather be short this stock than long.

The article iRobot Corporation Seems Pretty Pleased With Itself. Should It Be? originally appeared on Fool.com.

Rich Smithdoes not in fact own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 347 out of more than 75,000 rated members.The Motley Fool, on the other hand, both recommends and owns shares of iRobot. And The Motley Fool ranks pretty highly as well. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.