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Introduction

FLIR Systems (FLIR) is an $8.08 billion company in the aerospace & defense industry. Market capitalization competitors in this industry include Alliant Tech, DRS Technologies, and Goodrich. The aerospace & defense industry is down 18.64% over the past year compared to the S&P 500 which is down 11.74% during the same period. Over the past month, the industry has been down 9.88%, while the S&P 500 has been down 3.92%. Strong technical trends may be indicative of a continued expansion in this industry. Evidence comes from a potential turnaround in general equities. Moreover, as there seems to be evidence of confidence in equities, aerospace & defense stocks like FLIR Systems will see future benefits. Also FLIR System’s growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what FLIR Systems produces. According to Reuters, FLIR Systems, “incorporated in 1978, engaged in the design, manufacture and marketing of thermal imaging systems.” The company divides its operations into three specific segments: thermography, commercial vision systems, and government. Through the company’s products, FLIR systems, sells its goods to a variety of consumers. These consumers include commercial, industrial, governmental, and international clients. With the company’s international presence, FLIR Systems is able to directly benefit from the weak dollar, which is illustrated by the company’s high revenue stream.

More specific about the products, FLIR Systems first focuses on thermography products. The thermography business focuses on creating imaging devices to detect temperature changes. These products are used in the industrial and commercial businesses. The commercial vision systems region include products such as perimeter security, automotive night vision, and marine goods. The last business segment, government systems products, focuses on producing goods for the military, law enforcement, and paramilitary forces. These products are used to see an object over long distances away.

Growth

FLIR Systems has illustrated solid growth prospects over the past year. According to Reuters, FLIR Systems reported a $0.77 billion revenue product last year. This number is up over 38.11% than it was the previous year. Compared to the industry’s average of 4.74%, investors see the relative strength compared to other competitors. This number is higher than the company’s five year average of 24.45%. Moreover competitor annual averages of -17.02% (Alliant) and 16.81% (DRS Tech) are lower than FLIR System’s current figures. And given that FLIR System’s five year average of 24.45% is higher than the industry’s five year average of 7.11%, this company has the potential to move even higher. FLIR System’s earnings grew at a strong 25.03% last year—a number much lower than the industry average. Competitors such as Alliant only saw a 15.58% fall and DRS saw a disappointing decrease in earnings of 20.40%. Therefore, both earnings and revenue growth is strong for FLIR Systems.

In addition, FLIR Systems has kept its costs under control. According to Reuters, FLIR Systems has reported gross, operating, and net profit margins of 55.47%, 24.67%, and 17.29% respectively over the past year. Moreover, these numbers are above the industry averages of 9.02%, 4.32%, 17.29% respectively. The numbers are also above or near the company’s five year average respective numbers of 54.17%, 23.79%, and 16.70%. This comparison illustrates a history of strong cost controls and positively-related consistency. The current averages are also better (business model respected) than competitor Goodrich’s respective operating and net income averages of 14.53%, and 8.35%. The same comparison can be made for Alliant Tech and DRS Tech. Therefore, FLIR Systems has proved to be a solid company in this industry. Its services are well-controlled cost wise, especially to direct market-cap competitors.

Compiling all this information together and investors comes across ROE. Over the past year, FLIR Systems reported an ROE of 26.61%. Therefore, out of all shareholder equity, more than 27% (above five year average of 27.20%) come from earnings instead of debt or stock. This number is much stronger compared to the industry average of 13.58%, and the number is better than some competitor averages 10.48% (DRS Tech) and 22.84% (Goodrich). Therefore, FLIR Systems has a history of strong earnings per its equity share—which reflects the strong capital gain movement over the past year. And if history is any indication, there should be no reason why FLIR Systems cannot continue its success. The same logic applies to FLIR System’s 15.54% ROA (above industry average) 18.71% ROI (above industry average).

Valuation

With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not strictly the case. FLIR Systems has a forward P/E ratio of 41.63 and a price to sales ratio of 6.28 compared to the industry’s respective 8.01 and 0.44, which shows a relatively overvalued status. In comparison, the rest of the market cap competitors have ratios that higher than FLIR Systems. Alliant has a forward price to earnings ratio of 16.40 and price to sales ratio of 0.82. What makes FLIR System’s figures are more enticing is these competing firms aren’t growing so greatly as strongly as FLIR Systems. FLIR Systems can now be seen as both a growing and valued company. Moreover, FLIR Systems has a relatively low PEG (1.64) ratio compared to other competitors’ numbers as well.

Efficiency

FLIR Systems is efficient. Inventory turnover at 2.20 is strong compared to other industry market-cap rivals (Alliant). Moreover, asset turnover is also strong at 0.90 compared to competitor figures. Receivables turnover were at 4.72, but cash is not an issue for FLIR Systems. In terms of liquidation, FLIR Systems current ratio is at 3.76. This number is a bit risky, but the company’s capital expenditures have increased (46.18%) which means further increases in capacity and economies of scale may be present in the future, because of this financing. Moreover, institutions own 92.48% of all FLIR Systems shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability.

Technical Analysis

FLIR Systems performed great in the past year. The company’s share price has increased 84.04% year-to-year. This type of growth is beautiful for a recessionary-type economy, especially considering the fact that the housing market and construction is doing so poorly. There seems to be some support at the 25 dollar share price range dating back to late March 2008. The last time FLIR Systems reached this amount the company rebounded and appreciated 60%. There is a possibility a similar or better situation could occur in the future.

More specific to the current month, FLIR Systems illustrates strong technical signals. Parabolic SAR is below and upward trending the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 43.12, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of FLIR Systems according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

FLIR Systems is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
June 13th, 2008