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The Science of Hitting
The Science of Hitting
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Conference Notes and Update - FLIR

December 11, 2012 | About:

I recommended FLIR Systems (FLIR) to readers about six months ago, and the stock has hit a bit of a rough patch over that time period; as is generally the case, a growth stock that stops growing is bound to run into trouble. I’ve updated readers on the story in the past, and continue to like the investment at the current valuation. As a reminder, here’s some background info:

“FLIR Systems, which was founded in 1978 and is based out of Wilsonville, Ore., is the world leader in the design, manufacturing and marketing of thermal (infrared) imaging systems. Thermal imaging systems detect the infrared energy (heat) that is emitted by all people, objects and materials. Infrared cameras allow the operator to see in total darkness, adverse weather and through air pollutants as smoke and haze. The company’s products, which include advanced sensors and integrated sensor systems enable the gathering and analysis of critical information, with applications in commercial, industrial and government markets, via both off-the-shelf products (at retail) and system configurations suited to specific customer requirements.”

As I noted in the write-up, part of what makes FLIR attractive is a solid track record of opportunistic share repurchases; the company kept that alive with the Nov. 16 announcement that they had repurchased 3 million shares (equal to roughly 2% of outstanding share) of its common stock in a privately negotiated transaction at $18.55 per share – a transaction that I believe will once again prove advantageous to long-term investors with time.

Tony Trunzo, chief financial officer for FLIR, recently presented to investors at the Nasdaq OMX 29th Investor Program; here are some shorthand notes from Trunzo’s presentation:

Remarkable growth over the past decade, with revenue up 22% per annum since 2001 and EPS at a slightly faster rate

U.S. government accounts for about 25% of revenue at this point (29% over the past 12 months), and decreasing “at a fairly rapid rate” as the non-military piece of FLIR grows

2012 will be the first year since 1998 that FLIR will not report increased revenue and earnings: “It’s been a great run, and I think the run is very well poised to continue… this has been a little bit of a tough year – we’ve had the double headwinds of a very challenging global macroeconomic environment and weak demand from the U.S. government at the same time.”

“Government procurement is changing” (government infrared is a roughly $5 billion market) – “you will see pressure on funding even for important and critical technologies such as ours.”

That should be put in perspective: FLIR’s U.S. government revenues grew 25% per annum over the past decade, in a period where Department of Defense spending grew 8% annually; the growth rates in DOD spending (and as a corollary, FLIR’s U.S. government business) will certainly be lower in the future – the question is how much. However, as I noted in my original thesis, it’s important to recognize that FLIR is different from defense contractors in that they don’t focus on a “cost plus” operating model – they bear the risk of their R&D and have an incentive to be as lean as possible; I suggest rereading my submission to see why this is critical.

China has slowed down “fairly materially for us this year.” However, this is being offset by continued expansion in other regions around the world: “Good growth in Latin America and in South Asia… and we expect that to continue.”

The last 12 months, in terms of total shareholder return (TSR), was “about as bad as it gets for FLIR” – over that time, the stock declined a bit more than 20%. The long-term investor might see these poor stock market results and see an increasingly attractive opportunity…

“We did not have a great 2012 – we expect 2013 to be better.”

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

Rating: 3.9/5 (8 votes)


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