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Update on Value Contest Submission - FLIR
Posted by: The Science of Hitting (IP Logged)
Date: June 27, 2012 09:20AM

I submitted a contest submission two months ago pitching FLIR Systems (FLIR), the world leader in the design, manufacturing and marketing of thermal (infrared) imaging systems. The stock has gotten pummeled over that time period (down 15% compared to 5-6% for the DJIA and the S&P 500), which is just fine by me; nothing fundamental has changed, which has left FLIR even more attractive. CFO Tony Trunzo recently updated investor’s on the story at the William Blair & Company Growth Stock Conference; here are some of the key highlights:

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)

CATEGORY 2006 2011
Global Thermography Systems 54% 61%
Global Other Commercial IR Systems 19% 33%
Global Military IR Systems 8% 11%

Stocks Discussed: FLIR,
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