FLIR Systems Benefiting from Defense Spending
The United States has penciled in around $825.0 billion for its 2018 military budget, which is massive, and more than the military spending of the next seven countries combined.
The defense sector is growing, despite the fact that we hope no major war will break out. But, with North Korea continuing to be a global threat, and with Iran still in the dog house (despite the Iran nuclear deal), the demand for weapons will likely remain high.
A small-cap play on the defense sector with excellent long-term prospects is FLIR Systems, Inc. (NASDAQ:FLIR), a developer of next-generation sensing technologies used in military and commercial applications that require pinpoint precision.
The company’s solutions include thermal imaging systems, visible-light imaging systems, locator systems, measurement and diagnostic systems, and advanced threat detection systems.
FLIR stock has been on a steady incline, along with the rest of the defense stocks, advancing 45% over the past year, including a 10% gain in January.
A look at the price chart shows FLIR stock staging an upside trade gap a few weeks ago and breaking away from the sideways channel at around $47.00 to above $50.00. The previous time that FLIR stock broke out of its sideways channel, at around $37.00 in October 2017, resulted in a major upward move of over 30%.
Chart courtesy of StockCharts.com
My Bull Case for FLIR Stock
FLIR Systems saw revenues rise from $1.5 billion in 2014 to $1.7 billion in 2016. The revenue growth of 6.75% in 2016 was eye-popping, to say the least, but it was an improvement over the 1.76% jump in 2015.
Looking ahead, FLIR Systems is expected to grow revenues by 7.9% to $1.79 billion in 2017 and 5.3% to $1.9 billion in 2018. (Source: “FLIR Systems, Inc. (FLIR),” Yahoo! Finance, last accessed February 1, 2018)
FLIR Systems is maintaining gross margins at around 45%, but the company is growing its expected earnings at a higher rate than the revenue growth.
Earnings growth is estimated at 22.51% in 2017 and 10.27% in 2018, outpacing the corresponding revenue growth of 7.9% and 5.3%, respectively.
The five-year compound annual growth rate (CAGR) for earnings is 15.95%, well ahead of the 4.28% for the past five years.
FLIR stock trades at a reasonable 17.8 times its consensus earnings per share (EPS) for 2018, along with a price/earnings to growth (PEG) ratio of 1.18, which implies that there will likely be more gains on the horizon.