iRobot was founded in 1990 by roboticists from MIT. The founders of iRobot have impressive credentials as CEO Colin Angle designed the behavior-controled rovers for NASA’s 1997 Mars exploration, and co-founder Dr. Rodney Brooks is the director of the MIT Computer Science and Artificial Intelligence Lab. The company’s goal is too create robots that can perform dull, dirty, and dangerous duties in a safe and efficient manner.

The robots iRobot creates are powered by iRobot’s proprietary AWARE Robot Intelligence System. This system allows the robots to navigate through complex situations. The AWARE system allows iRobot Roomba and Scooba robots to maneuver around household furniture and it allows the iRobot PackBot Tactical Mobile Robot to search abandoned buildings and help find and dispose of explosive devices.

The iRobot product line consists of the Roomba vacuum, the Dirt Dog vacuum, the Scooba moping robot, and various configurations of the government and industrial PackBot robot.

In the home robots division, the Roomba has sold over two million units since its 2002 introduction. Although these sales represent a market penetration of under 2%, Roomba owners have largely been satisfied and reviews of the Roomba are usually highly positive. Although Roomba is designed to work on all varieties of household floors, some reviews show better results on hard floors than on carpet.

Scooba was introduced in May of 2005 and despite some problems with the original batteries, consumers were largely happy with the performance of Scooba. Although Scooba may require more than one use for overly dirty floors, it works well if used regularly on moderately dirty floors. Although iRobot claims that Scooba works on sealed hardwood floors, the solution for the Scooba is co-branded by Clorox. Since Clorox is better known for more harsh cleaning solutions that would damage hardwood floors, Scooba is a tough sell for hardwood floor owners. Scooba’s original price was high and initial sales disappointed. However, Scooba’s price was reduced and iRobot is still positive about the potential growth of the Scooba line.

Rounding out the home robots division is the iRobot dirt dog introduced in September of 2006. This is a puzzling addition to the iRobot lineup as it is basically just a Roomba painted yellow. The Dirt Dog is marketed as a “workshop” robot and iRobot claims that the Dirt Dog uses a more powerful brush designed to pick up small nuts, bolts, and other shop floor debris. Even if the Dirt Dog does have a more powerful brush than Roomba, why does the Dirt Dog cost less? We think the Dirt Dog has limited consumer appeal and it presumably has lower margins than Roomba.

In the Government and Industrial division iRobot products include the PackBot Scout, the PackBot Explorer, and the PackBot EOD. iRobot has sold over 800 of these robots and they recently received an additionally US military contract valued at $16 million. Growth of PackBot sales has been strong and the company exceeded 2006 expectations for PackBot revenue. PackBot’s have been credited with saving lives in Iraq and the company claims that military personnel have been very satisfied by the PackBot performance and ease of use. iRobot has many research and development projects underway to expand its portfolio of government and industrial robots.

iRobot has a market cap of about $375 million, a P/E of about 110, about $70 million in cash and no significant long term debt. Although the P/E is high, the market cap is reasonable for a company with significant growth prospects and a valuable portfolio of intellectual property.

iRobot recently reported disappointing fourth quarter results. Revenue and profits were slightly lower than analyst expectations as the company swung to a quarterly net loss of $1.8 million. Guidance was also somewhat disappointing as the company said they expected 2007 income to be in the range of $2-$4 million. The stock responded accordingly closing Friday at $15.90 down nearly 20% from its pre-earnings price.

On the positive side, iRobot did report a small incremental increase in margins and they reported strong results for the Government and Military division. They also forecast strong growth for the second half of 2007. This growth will be driven by a new product introduction, but iRobot declined to supply any details about the new product. If this new product is in the same category as the last “new” product the Dirt Dog, iRobot will be in trouble. In other words, if this summer iRobot comes out with a new product called the Dirt Cat which is really just a Roomba painted orange, investors should run of for the hills. However, Wall Street Mayhem expects this summer’s new product to be a legitimate new product. Previously management has hinted at the possibility of a clothes folding robot, a bathroom cleaning robot that could clean toilets and walls (hopefully not at the same time), and various industrial robots including a MicroRig designed to carry payloads into oil wells.

Since its IPO in late 2005, investors in iRobot have been consistently disappointed. Investors that were willing to pay high multiples for shares of iRobot have been expecting stronger growth than iRobot has produced. As a result, iRobot’s market cap has been cut in half since its IPO.

Insider selling has continued to pressure iRobot since the lock up period expired in May of 2006. To make matters worse, iRobot management seems genuinely confused about why the insider selling has caused disgruntled shareholders. The simple concept of supply and demand appears to be too much for these MIT roboticists to understand. Despite the negative publicity, when asked about insider selling in an article in TheStreet.com, CEO Colin Angle recently stated, “We will look at how the program has been perceived and how we can tweak it. But diversification is something that we are committed to.” In many contexts commitment to diversification is a good thing, this is not one of those contexts. iRobot could have said, “we are committed to creating additional downward pressure on our share price” and the take away message for shareholders would have been the same. In order to stop creating additional downside pressure for iRobot shares, insider selling does not need to be “tweaked”, it needs to be eliminated. To be fair it is not at all unusual for a newly public company to see considerable insider selling. However, without significant concurrent positive catalysts, it is obvious that this selling contributes to lower share prices.

iRobot has yet to prove that it can turn its robotics expertise into a company that consistently makes money. However, robotics is clearly a large growth industry and iRobot is a leader in this industry. iRobot’s products are useful and the company has millions of satisfied customers. The PackBot has experienced impressive growth and it is credited with saving lives in Iraq. Margins are improving at iRobot and market penetration is still low despite high levels of customer satisfaction.

For now, iRobot is still on the watch list at Wall Street Mayhem. Valuation for iRobot is now reasonable and the company has the potential for strong growth, but we are waiting to see reduced insider selling and the introduction of at least one innovative and useful new product. Right now we don’t see a significant near term catalyst for iRobot, but if one presents itself we will be buyers of iRobot.

Full disclosure: Wall Street Mayhem has no position in IRBT