FLIR Systems, Inc: Way Too Cheap, a Double Just to Start

FLIR Systems, Inc Is this Military Stock Way Too Cheap
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FLIR Systems Will Boom From the Surge in Military Spending

The U.S. defense budget for 2019 is set at over $700.0 million, and based on what we are seeing in the geopolitical space, the spending could rise from here. There will be plenty of funds to go around to the hundreds of companies that provide products and services to the military.

In the mid-cap segment, one of the top defense stocks is FLIR Systems, Inc. (NASDAQ:FLIR), a provider of advanced sensing technologies for military and commercial applications that demand extreme precision.

FLIR Systems develops thermal imaging systems, visible-light imaging systems, threat detection systems, locator systems, and diagnostic and measurement systems.

But FLIR stock has been under pressure after reporting a small revenue contraction in 2018. The good news is that FLIR grew its profits and free cash flow (FCF) and is estimated to ramp up its revenues and profits over the next two years.

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Now could be an opportune time to accumulate shares of FLIR stock, given that the stock is down 23% over the past year and up a mere 5.1% this year.

Chart courtesy of StockCharts.com

A closer examination of the above stock chart shows FLIR stock holding above $40.00 and eyeing upside targets of $52.60, $54.74, and $63.88.

The Bull Case for FLIR Stock

FLIR Systems, Inc. increased its revenues from 2015 to 2017, prior to recording a small decline in 2018, as the below table shows.

Fiscal Year Revenue (Billions) Growth
2014 $1.5
2015 $1.6 1.7%
2016 $1.7 6.8%
2017 $1.8 8.3%
2018 $1.8 -1.4%

(Source: “FLIR Systems Inc.MarketWatch, last accessed August 16, 2019.)

A positive sign is that FLIR is estimated to reverse things and record an 8.8% increase in revenues to $1.9 billion in 2019, followed by a 5.9% increase to $2.1 billion in 2020. (Source: “FLIR Systems, Inc. (FLIR),” Yahoo! Finance, last accessed August 16, 2019.)

FLIR has also been generating positive earnings before interest taxes depreciation, and amortization (EBITDA), with growth in three of the last four years.

Fiscal Year EBITDA (Millions) Growth
2014 $333.5
2015 $356.7 7.0%
2016 $355.0 -0.6%
2017 $384.0 8.3%
2018 $420.8 9.6%

(Source: MarketWatch, op cit.)

The company has been consistently profitable on a generally accepted accounting principles (GAAP) and adjusted basis. Its GAAP diluted earnings per share (EPS) surged to a five-year high in 2018.

Fiscal Year GAAP Diluted EPS Growth
2014 $1.39
2015 $1.72 23.1%
2016 $1.20 -30%
2017 $0.77 -36.2%
2018 $2.01 162.4%

(Source: Ibid.)

Following that, FLIR Systems, Inc.’s GAAP diluted EPS is expected to increase to $2.34 this year and to $2.61 in 2020. (Source: Yahoo! Finance, op. cit.)

FLIR has also been producing positive FCF, with growth in three of the past four years, including a five-year high in 2018.

Fiscal Year FCF (Millions) Growth
2014 $165.0
2015 $207.6 25.8%
2016 $276.3 33.1%
2017 $266.1 -3.7%
2018 $343.4 29%

(Source: MarketWatch, op. cit.)

Analyst Take

FLIR stock looks like it has a decent risk-to-reward ratio at its current price. The near term could be a bit choppy, given the broader market risk, but the long term looks positive.

FLIR Systems, Inc. is expected to grow its earnings at 21.9% over the next five years, versus 11.2% during the last five years.

The price-to-earnings-growth (PEG) ratio of 0.9 implies that FLIR stock is trading below its five-year growth rate for earnings. Even if the stock rallied back to its high at more than $64.00, the PEG ratio would rise to a relatively attractive 1.3.