iRobot Has Much to Gain if Trump's China Talks Go Well

When iRobot's (NASDAQ: IRBT) stellar third-quarter results were overshadowed by the impact of new tariffs on goods imported from China, its shares ultimately lost 20% of their value last month.

But with fresh trade talks scheduled later this week between U.S. President Trump and China President Xi Jinping at the G20 summit in Argentina, the home robotics specialist is likely poised for more volatility -- for better or worse -- in the days ahead.

Reason for pessimism?

For perspective, investors specifically lamented iRobot's prediction that it will take a $5 million hit to operating income in the fourth quarter due to Trump's imposition of a 10% tariff on robotic vacuums manufactured and imported into the U.S. from China -- a consequence of the fact that iRobot still derives the majority of its sales from its core Roomba robotic vacuum. Worse yet, iRobot management warned that as planned, those tariffs are set to increase to 25% at the start of 2019, which would hurt earnings while simultaneously putting "moderate pressure on a strong [robotic vacuum cleaner] category."

If this week's trade talks go well, however, there's a chance iRobot could see a reprieve -- though Trump appeared to squash the notion ahead of the meeting.

"I think we're very close to doing something with China, but I don't know that I want to do it because what we have right now is billions and billions of dollars coming into the United States in the form of tariffs and taxes," Trump told reporters before departing for the meetings on Thursday. "[...] I'm open to making a deal, but, frankly, I like the deal we have right now."

At the same time, on Thursday afternoon The Wall Street Journal reported (may require subscription) that officials from both countries are considering a new trade pact to ease tensions. The pact would involve the U.S. delaying significant further tariffs through the spring in exchange for new talks to explore major changes to China's economic policies.

The silver lining

In any case, considering iRobot is targeting full-year 2018 operating income of less than $100 million this year, this previously unanticipated expense could prove a massive drag not only on the Massachusetts-based company's profits, but also on its ability to invest in crucial R&D to maintain its leadership position in the fast-changing home robotics market.

That's not to say iRobot can't still survive and thrive should the tariffs increase to 25%. According to founder and CEO Colin Angle during last month's earnings call, the company has chosen not to pass the cost of tariffs on to consumers through price increases in 2018. But Angle says iRobot will look for "cost-reduction opportunities to help mitigate the impact on prices, margin, and the long-term growth of the segment."

When pressed by analysts for further details on the timing of those efforts, Angle said we could see the positive impact of "some" of those cost reductions in 2019. He also reminded investors that the tariffs "only" impact iRobot's business in the U.S., giving the company more incentive to focus on expanding its presence in other fast-growing markets like Japan and Europe.

"Longer-term, things would involve looking at where we manufacture," Angle added. "[If] it looks like we're in this for the long haul, we have options on that front as well."

In the end, this could mean iRobot emerges a stronger, more efficient company that's better poised to cement its central role in the home robotics industry. So with shares trading more than 20% below their highs set in August, I think now could be an ideal time for patient shareholders to open or add to their positions.

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Steve Symington owns shares of iRobot. The Motley Fool owns shares of and recommends iRobot. The Motley Fool has a disclosure policy.