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FLIR Systems, Inc. (NASDAQ:FLIR) designs, manufactures, and markets thermal imaging and broadcast camera systems for a variety of applications in the commercial and government markets. FLIR makes products for condition monitoring, research and development, airborne observation and broadcast, search and rescue, and surveillance and reconnaissance.
2009 marked the tenth straight year of improving YOY results for FLIR Systems. Full year EPS were up 14% climbing from $1.28 to $1.46. Fourth quarter earnings slightly disappointed however at $0.38 versus $0.41, and the shares pulled back to finish today at $26.47 from $33.35 in late December and an all-time high of $45.50 in 2008 (see latest earnings transcript here).
Here are FLIR’s (split-adjusted) per share numbers from continuing operations as reported by Value Line:
Year
Sales
C/F
EPS
B/V
Avg. P/E
52-wk Range
2001
1.62
0.25
0.20
0.79
14.5x
0.50 – 6.20
2002
1.89
0.35
0.29
1.25
18.6x
3.40 – 7.40
2003
2.37
0.39
0.32
1.25
21.7x
5.10 – 9.30
2004
3.49
0.62
0.47
2.27
27.0x
8.70 – 16.70
2005
3.67
0.77
0.58
2.67
24.4x
10.20 – 18.20
2006
4.37
0.92
0.66
3.03
20.3x
10.70 – 17.00
2007
5.70
1.19
0.89
4.56
26.5x
14.80 – 36.40
2008
7.62
1.72
1.28
5.94
26.1x
23.70 – 45.50
2009
7.52
1.82
1.46
7.73
16.8x
18.80 – 33.35
Along with their Q4 report, management indicated expectations of $1.48 - $1.53 for 2010. Consensus views have adapted and now center on $1.51 and $1.68 for this year and next.
That puts FLIR’s multiple at about 17.5x the 2010 view and < 15.8x the 2011 estimate. Those are near the low end of the valuation range of the past nine years, making this a potential buying opportunity.
FLIR has a pristine balance sheet. They have no short-term debt and total debt equals only about 5% of capitalization. Interest coverage is over 33x.
Value Line puts their stock’s "price growth persistence" in the 90th percentile and their "earnings predictability" in the 95th (with 100th being best).
While there’s no near-term catalyst to get investors excited, the recent pull-back seems to have mitigated most of the risk in holding this stock. With that in mind, here’s a nice play from now through Oct. 16th that can work well if these shares do nothing or even if they decline down to $25 by then.
Cash Outlay
Cash Inflow
Buy 1000 FLIR @ $26.47 /share
$26,470
Sell 10 Oct. $25 calls @ $3.30 /share
$3,300
Sell 10 Oct. $25 puts @ $1.90 /share
$1,900
Net Cash Out-of-Pocket
$21,270
If FLIR remains > $25 through Oct. 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 in cash.

This best-case scenario will generate a cash-on-cash profit of:

$25,000 - $21,270 = $3,730
$3,730/$21,270 = + 17.5%
This would have been achieved in under eight months on shares that:
  • Went up.
  • Stayed unchanged.
  • Declined by up to $1.47 /share or (-5.5%).
What’s the downside?
If FLIR finishes < $25 on Oct. 16, 2010:
  • The $25 calls will expire worthless.
  • The $25 puts will be exercised.
  • You will be forced to buy another 1000 shares.
  • You will need to lay out an additional $25,000.
  • You will end up with 2000 FLIR shares.
What’s the break-even on the whole trade?
On the first 1000 shares it’s their $26.47 purchase price less the $3.30 /share call premium = $23.17 /share.
On the ‘put’ shares it’s the $25 strike price less the $1.90 /share put premium = $23.10 /share.
Your overall break-even would be $23.14 per share. FLIR could drop by up to $3.33 /share or (-12.5%) without causing a loss on this trade.
Summary:
FLIR’s pullback has gotten me interested again and because of the reduced expectations for the next few quarters, I’m playing this now as a buy/write with in-the-money calls and out-of-the-money puts.
If FLIR shares go up, stay unchanged or drop less than 5.5% I’ll net 17.5% for the 7.25 months or 28.9% annualized.
Disclosure: Author is long FLIR shares and short FLIR options.
Source: FLIR Systems: Thermal Imaging Could Heat Up Your Returns