Revenue Growth? For Real?

08/18/2009 10:05 am EST


Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer’s Investment Research finds a tech company that’s posting real sales growth, but he wonders how long that can last.

While many companies have had to slash costs in order to meet Wall Street's earnings expectations this quarter, a few firms have accomplished the same end by increasing revenue despite the recession. FLIR Systems (NASDAQ: FLIR), maker of infrared and thermal imaging cameras, is one such company, according to BusinessWeek.

On July 23rd, FLIR posted a 6.5% increase in second-quarter revenues, though the company's growth rates have historically been closer to 20%.

[But] the slowing growth hasn't deterred Wall Street analysts. Michael Lewis, BB&T Capital Markets, currently maintains a buy rating on FLIR, and believes that the company could "grow consistently at 15% or more per year in the future." Lewis cites the US military's decision to utilize infrared technology in its vehicles as a potential driver for growth.

But, investors were looking for more than just meager growth from the company. The stock plunged nearly 10% following the company's second-quarter earnings report. In fact, investors have not been pleased with FLIR for quite some time, as the shares have plunged about 30% so far this year, vastly underperforming Standard & Poor’s 500 index's gain of roughly 9% for the same period.

Despite this poor performance, Wall Street analysts maintain a heavy bullish bias: Nine of the 14 brokerage firms following FLIR rate the shares buy or better, according to Zacks. Furthermore, Thomson Reuters reports that the consensus 12-month price target rests at $28.80 per share, a premium of 30% to the stock's close, around $22, Monday.

Options traders are also betting on a rebound in FLIR shares: The security's [recent] Schaeffer's put/call open interest ratio (SOIR) of 0.56 reveals that calls nearly double puts among near-term options. What's more, FLIR's International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) ten-day call/put ratio of 2.96 means that calls bought to open almost triple puts purchased on these exchanges during the prior two weeks.

FLIR can ill afford these bulls to jump ship now, as the stock has pulled back to its former trading range between the $20.50 and $22 levels. What's more, the stock has pulled back below its ten- and 20-day moving averages. These trend lines have also just completed a bearish cross, a technical formation that often precedes additional short-term losses for the shares.

In conclusion, while FLIR may be one of the few companies that have found a way to grow revenue during the economic downturn, the firm is still not living up to expectations. As such, it could still be a solid long-term investment, but investors may want to wait a while before jumping on the shares, as there could be better entry points down the road.

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