FLIR Systems: Heat Up Your Portfolio with Thermal Imaging

FLIR Systems, Inc. (NDAQ:FLIR) Sep. 8, 2009 close: $23.71

52-week range: $18.81 (Mar. 9, 2009) - $39.24 (Oct. 1, 2008)

FLIR Systems, Inc. is the global leader in Infrared cameras, night vision and thermal imaging systems. Our products play pivotal roles in a wide range of industrial, commercial and government activities in more than 60 countries. Pioneers in the commercial infrared camera industry, the Company has been supplying thermography and night vision equipment to science, industry, law enforcement and the military for over 30 years. From predictive maintenance, condition monitoring, non-destructive testing, R&D, medical science, temperature measurement and thermal testing to law enforcement, surveillance, security and manufacturing process control, FLIR offers the widest selection of infrared cameras for beginners to pros.

FLIR has been a steady performer in a niche business. 2009 will be the ninth straight year of increased sales and earnings. Government related sales were about 53% of 2008 revenues. Home Inspectors use FLIR products to check for mold behind walls and to pinpoint heat leakages. BMW automobiles use FLIR technology in their night-vision option package on their high-end cars. Electricians use FLIR’s handheld viewers to locate energy leaks within walls. The company continues to do R&D on new uses for its products and to lower the manufacturing costs enough to make them cost effective for more end users.

Here are their impressive (split-adjusted) per share numbers from continuing operations as reported by Value Line:

Year	Sales	C/F	EPS	B/V	Avg. P/E
2001	1.62	0.25	0.20	0.79	14.5x
2002	1.89	0.35	0.29	1.25	18.6x
2003	2.37	0.39	0.32	1.25	21.7x
2004	3.49	0.62	0.47	2.27	27.0x
2005	3.67	0.77	0.58	2.67	24.4x
2006	4.37	0.92	0.66	3.03	20.3x
2007	5.70	1.19	0.89	4.56	26.5x
2008	7.62	1.72	1.28	5.94	26.1x

First half 2009 EPS came in at $0.70 versus $0.53 (+ 32%) and Zacks sees full year earnings at $1.43 v. $1.28 despite the recession. They presently estimate $1.52/share in 2010. That makes FLIR’s multiple about 16.6x this year’s and 15.6x next year’s expectations. That’s their lowest levels since 2001.

Buyers of FLIR shares in 2001 saw their shares surge from a split-adjusted $0.50 to $18.20 over the next 3.5 years. The shares bottomed briefly again at $10.60 in mid-2006 at a 16.2 multiple that is similar to today’s level. Buyers at that time saw their shares rise to a peak of $45.50 by June of 2008.

FLIR’s balance sheet looks beautiful. As of their end of June report they held $346 million in cash against total debt of just $89 million. No debt comes due in the next five years. Current assets of $863 million dwarf current liabilities of $157 million. Debt is just 8% of capital and interest coverage was 33.8x last year.

Value Line rates their ‘price growth persistence’ and ‘earnings predictability’ as being in the 85^th and 95^th percentiles respectively (with 100^th being tops). Standard and Poors assigns them 4-stars (out of 5) and sees a 12-month target of $28 /share.

A reversion to even 17.5 times this year’s estimate leads me to a $25 goal price by the time year-end numbers are released. Is that a crazy expectation? If anything, it’s probably too conservative. FLIR actually traded as high as $36.40, $45.50 and $32.30 in calendar 2007-2008 and YTD in 2009.

With that minimum target in mind I suggest the following trade to allow for excellent total return with a very reasonable break-even point.

	Cash Outlay	Cash Inflow
Buy 1000 FLIR @ $23.71 /share	$23,710
Sell 10 April $25 Calls @ $2.30 /share		$2,300
Sell 10 April $25 Puts @ $3.50 /share		$3,500
Net Cash Out-of-Pocket	$17,910

If FLIR shares climb by to at least $25 (+ 5.5%) by April 16, 2010:

• The $25 calls will be exercised.
• You will sell your shares for $25,000.
• The $25 puts will expire worthless.
• You will have no further option obligations.
• You will end up with no shares and $25,000 cash.

That’s a best-case scenario profit of $7,090/$17,910 = 39.5% achieved in less than 7.5 months on shares that only needed to rise by 5.5%.

What’s the risk?

If FLIR shares close below $25 on April 16, 2010:

• The $25 calls will expire worthless.
• The $25 pits will be exercised.
• You will be forced to buy an additional 1000 FLIR.
• You will need to lay out another $25,000 in cash.
• You will have no further option obligations.
• You will end up with 2000 FLIR shares.

What’s the break-even on the whole trade?

On the original 1000 shares it’s their $23.71 purchase price less the $2.30 /share call premium = $21.41 /share.

On the ‘put’ shares it’s the $25 strike price less the $3.50 /share put premium = $21.50 /share.

Your overall break-even would be $21.46 /share.

FLIR could drop by as much as $2.25 /share (-9.5%) without causing a loss.

Summary:

FLIR Systems is a healthy growth company trading at one of the lowest valuations in its history. Sales and earnings are on pace to continue their string of records since 2001. A slight rebound to a still below normal P/E will put these shares back above $25 making the best-case return of 39.5% a very real possibility on any move up of at least 5.5% by next April’s expiration date.

If we’re wrong on our expectations we have a built-in margin of safety of 9.5% before any losses would occur.

Disclosure: Author is long FLIR shares and short FLIR options.

Comments

[Senan:]

Big military deal a few days ago sent the share price surging. It's now above your hope of $26 by year eand already. Still value?

Oct 01 04:51 AM

[Paul Price:]

FLIR Systems Tops Expectations

By: Zacks Equity Research

October 21, 2009


FLIR Systems, Inc. (FLIR - Snapshot Report) reported third quarter 2009 net income of $60.0 million or 38 cents per diluted share, compared with net income of $54.8 million or 35 cents per diluted share in the third quarter a year ago. This is higher than the Zacks Consensus Estimate of 35 cents.

Revenue was $285.6 million, up 3% compared to third quarter 2008 revenue of $276.7 million. Revenue from the company’s Government Systems division increased 7% over the third quarter of 2008 to $163.0 million, with strength in stabilized gimbaled systems. Revenue from the Company’s Commercial Vision Systems division increased 15% over the third quarter of last year to $52.6 million, reflecting growth in the security, cores and components, and maritime markets.

Revenue from the company’s Thermography division decreased 12% from the third quarter of last year to $69.9 million, primarily due to lower demand for high-value products for the predictive maintenance market.

The company announced that it has acquired OmniTech Partners, Inc., a leader in the development and manufacturing of image intensified and fused image intensified / thermal imagers based in Freeport, PA, for $42 million in cash. OmniTech adds image intensified capability to FLIR’s product line, and creates the opportunity to leverage the capabilities of both companies to expand in the growing market for fused image intensified / thermal imagers.

Total cash and equivalents at the end of the quarter stood at $403 million, with long-term debt at $60.2 million and shareowner’s equity at $$1.1 billion.

FLIR Systems, Inc. is a leader in the design, manufacture and marketing of thermal imaging and stabilized camera systems for a wide variety of thermography and imaging applications. These include condition monitoring, manufacturing process control, airborne observation and broadcast, search and rescue, drug interdiction, surveillance and reconnaissance, navigation safety, border and maritime patrol, environmental monitoring and ground-based security.

Oct 22 03:11 PM

[Paul Price:]

Businessweek Magazine spotlighted FLIR in their "Inside Wall Street" column (Nov. 2, 2009 issue).

They led with the headline "Laser-Like Growth at FLIR" and called it "the cheapest value" now among growth stocks - #1 in infrared technology for various purposes, including military use.

Oct 25 07:38 AM