FLIR Systems (FLIR) VP of Investor Relations, Shane Harrison, recently presented at William Blair's 33rd Annual Growth Stock Conference (CFO Tony Trunzo was supposed to be there, but his flight to the conference was cancelled); as I’ve noted in the past, I believe FLIR trades at a sizable discount to intrinsic value, and will continue to update readers on the story to avoid any unwanted surprises. With that, let’s get to the good stuff:
“Our whole mantra is all about lowering costs [of infrared cameras to end customers] so that thermal imaging can be out there and everyone can own thermal imaging, because it’s still frankly a very expensive technology.” In Commercial Systems (within TVM), ASP’s (average selling price) fell by 14% per annum over the past five years; as a result, volumes increased at a pace of 27% per annum, with revenue increasing at a solid clip (double digits).
M&A – “Going forward, I wouldn’t expect us to do many more small deals and tuck in deals; we’re happy with our technology suite, we like our product suite. We’re going to be focused on building out distribution and building out channels to sell much cheaper technology, which we’re currently working on and investing in… We’re currently under a program where over the past two years we’ve been investing money to essentially come up with the next generation thermal detector that will bring the cost, to us, of that detector down by an order of magnitude. That’s extremely significant in this industry, and we think we’re well ahead of most of the competition in that space.”
MARKET SHARE – “We are number one in all of our commercial markets” – As I noted in my first article pitching FLIR, the company’s share in thermography products has been estimated by independent, third party researchers to be north of 60%, up from the mid-fifties a few years ago. Going back to the previous point outlining the virtuous cycle of volume growth and falling prices, it’s quite clear why having such outsized economies of scale are critical to success.
SHARE REPURCHASES – “We bought back 10.5 million shares last year, and we’ve already bought back 4 million this year so far; again, it’s not a trickle, scheduled thing, it’s a very opportunistic strategy”. This is music to my ears – and their historical repurchase record shows that FLIR’s management has done quite a good job of getting aggressive when Mr. Market gives them the opportunity to do so. Also, just to be clear, this spend doesn’t come at the cost of reinvestment: the company continues to target (and put up) 8-10% of sales back into R&D, as well as low-mid single digits in the form of capital expenditures.
EXPANDING GLOBAL OPPORTUNITY - “Particularly in the Middle East, there are some interesting service and sales operations there that allow us to service the Middle East customer very well, and it’s a true selling point over the competitors that we have in the space that we play there, which is mainly border security.”
FLIR’s 2012 Hiccup: after years of EPS and revenue growth (dating back to the turn of the century), what happened? 1) Manufacturing slowdown, as shown in ISM data (“Really impacts a lot of our commercial markets, particularly the thermography business”); 2) U.S. DOD budget challenges (well-known); 3) General macro (Sale of commercial products to China, one of FLIR’s largest customers, have come down a bit as the country’s GDP growth has slowed).
There wasn’t too much in Mr. Harrison’s presentation that we haven’t heard before, and things still seem to be plugging along at FLIR; U.S. Government spending will likely continue to be the primary focus of most analysts, which opens up a great opportunity for investors who can see beyond that single business line (which is declining year after year as a percentage of FLIR’s sales). I’ll have more to add when we get second quarter results at the end of next month.
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.