FLIR is the largest commercial infrared company in the world, and growing rapidly; in the past decade, revenue and earnings per share have increased at an annualized rate of 22% and 23%, respectively. At the same time, the company has continued to reinvest in future growth, with R&D spend increasing at a rate of 16% per annum over that same period ($147 million in 2011).
The company is split into two divisions: government systems (46% of 2011 sales) and commercial systems (54% of sales). The geographic mix is nearly split right down the middle, with the U.S. government accounting for 29% of 2011 sales (down from roughly 40% in 2009).
Since 2002, government systems have grown at 17% per annum ($712 million in sales in 2011), while commercial systems has grown at 27% per annum ($832 million in sales in 2011). While this is attractive, it pales in comparison to unit growth (as I noted in the value contest submission, lowering per unit cost and price is key to FLIR’s success); over the past decade, management estimates that the company’s unit volume has increased at a compounded rate of 47% per annum.
While the growth has been impressive, management believes that there is plenty of opportunity for growth, and breaks down the addressable $22 billion market as such: $3.4 billion in Commercial IR, $9.5 billion in CBRNE (chemical, biological, radiological, nuclear and explosives detection), $2.8 billion in Maritime Electronics and $6.8 billion in Government IR.
Since 2001, the company has completed 16 acquisitions for a total cost of $802 million; for those deals, the average revenue CAGR has been 14% since the acquisition and the average annual return on the purchase price has been in the mid-teens (roughly 16%).
FLIR has consistently outperformed their peers (comprised of high performing instrument companies, including FEIC, GRMN, MKSI, MTD, NATI, PKI, ROP, RSTI, TRMB and WAT) in terms of margins; the company’s gross margin of 53.7% is 430 basis points higher than the peer median, while SG&A spend as a percentage of revenue is 540 basis points below the peer median at 21.3%; these two factors have resulted in operating margins that have consistently registered in the top quartile of the peer group, and a return on assets (ROA) in excess of 12%.
Share repurchases – “We bought back a million shares of stock in Q1 of this year; we’ve indicated that we’re going to continue, particular at these levels, to be active [buyers] of our own stock.”
MARKET SHARE GAINS (measured by MaxTech)
|Global Thermography Systems||54%||61%|
|Global Other Commercial IR Systems||19%||33%|
|Global Military IR Systems||8%||11%|
About the author:
I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over a period of many years.