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Thermal Profits Lights Up FLIR
02/25/2015 7:00 am EST
Our latest featured recommendation is the biggest thermal imaging company in the world; it makes thermal imaging cameras for drones and those cool ones on BMWs that literally let you see in the dark, explains Briton Ryle, editor of The Wealth Advisory.
Founded in 1978, FLIR Systems (FLIR) used to mainly be a defense supplier. At one point, the military accounted for 70% of revenue. But today, the military provides less than 30% of its $1.5 billion in annual sales.
Police now use these cameras to find suspects and for protection. The Coast Guard uses them to fight drug trafficking. There’s now a FLIR Systems thermal imaging camera you can attach to your iPhone that’ll run around $250.
FLIR Systems also makes a range of sonar products for fishermen that start as low as $200. The number of applications for which FLIR has products is extensive: home security, first responders, firefighters, electrical, and mechanical inspection, traffic control, etc.
Because they detect radiation (heat), thermal imagers do not require any visible light to produce an image, unlike night vision. And so, they can literally see through walls, vegetation, water, and dense smoke.
Total sales have been impacted by a decline in US military spending that resulted from sequestration. Revenues peaked in 2011 at $1.5 billion, but are expected to reach $1.61 billion for 2015.
It’s encouraging that the increase in revenue has come without an increase in the overall military budget. Increased military spending from here is a potential upside catalyst.
Based on forward earnings expectations, FLIR has a P/E of 17 and a PEG (Price-to-Earnings Growth) ratio of 1.5. These valuations suggest the stock is currently trading at fair value.
FLIR currently pays $0.40 in annual dividends, for a yield of 1.3%. The payout ratio is 36%. We do not anticipate a dividend in the next two quarters. But if the company appears able to meet 2015 revenue forecasts, we will likely see a hike in the second half of the year.
We rate the shares a buy with a 12-month price target of $41, based on our expectation that military spending will increase in 2015.
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