FLIR Systems, Inc

/ Equity Research / FLIR | Page 5

FLIR Systems, Inc.

/ (FLIR-NASDAQ)
/ Equity Research / FLIR | Page 5
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 05/08/2014
Current Price (05/07/14) / $33.74
Target Price / $35.00

SUMMARY

We have upgraded our recommendation on FLIR Systems to Neutral from Underperform with a target price of $35.00. The company reported decline in both earnings and revenues in the first-quarter of 2014. The top-line was affected by a dismal performance in its mining and metals business and prevailing sluggishness in the company’s government segment. The company is also getting impacted due to the political uncertainty in key regions like Russia. However, the company is likely to benefit from its ongoing restructuring activities. The company is streamlining its business by integrating the facilities and reducing costs. Also, FLIR continuously develops new products in order to increase its market share. Moreover, FLIR having successfully integrated Lorex business is now capitalizing on the gains from the business.
/ Equity Research / FLIR | Page 5

SUMMARY DATA

52-Week High / $37.23
52-Week Low / $23.71
One-Year Return (%) / 37.73
Beta / 0.74
Average Daily Volume (sh) / 1,217,910
Shares Outstanding (mil) / 141
Market Capitalization ($mil) / $4,753
Short Interest Ratio (days) / 3.89
Institutional Ownership (%) / 83
Insider Ownership (%) / 4
Annual Cash Dividend / $0.40
Dividend Yield (%) / 1.19
5-Yr. Historical Growth Rates
Sales (%) / 6.0
Earnings Per Share (%) / -0.5
Dividend (%) / 20.4
P/E using TTM EPS / 26.6
P/E using 2014 Estimate / 22.8
P/E using 2015 Estimate / 19.6
Zacks Rank *: Short Term
1 – 3 months outlook / 2 - Buy
* Definition / Disclosure on last page
Risk Level * / Average,
Type of Stock / Large-Blend
Industry / Elec-Military
Zacks Industry Rank * / 192 out of 267


OVERVIEW

FLIR Systems Inc. is an Oregon corporation and was incorporated in 1978. FLIR Systems Inc. is a leader in design, manufacture and marketing of thermal imaging systems. Its products are used in a wide variety of applications in commercial, industrial and government markets, internationally as well as domestically. It offers a variety of system configurations to suit specific customer requirements. FLIR reports under the following segments:

Surveillance: The segment includes the earlier Surveillance business as well as the Integrated System segment.

Detection: The segment includes the prior Detection business and the detection-oriented programs of the Integrated Systems business.

Instruments: The segment comprises of thermography and test and measurement business, targeted primarily at commercial and industrial markets.

Security: The segment includes the Lorex consumer security cameras and the FLIR-branded professional thermal and visible security products.

Maritime: The segment consists of the company’s Raymarine and FLIR-branded maritime thermal imaging products that were previously part of TVM.

OEM and Emerging Markets: This segment includes OEM Personal Vision Systems, mobile accessories and intelligent traffic solutions lines of business.

FLIR Systems believes that by streamlining its organization, it can further strengthen company-wide communication, collaboration and cooperation, while creating a logical structure that will further leverage its vertical integration and focuses on core markets.

REASONS TO BUY

Ø  FLIR’s core strength of providing moderated price and best quality services along with easy-to-acquire imaging and threat-detection technologies are expected to bolster the company’s growth in the future. The company continues to benefit from its well-diversified business portfolio in terms of geographies, products and markets. Additionally, FLIR’s newly introduced customized range of products by augmenting its number of booking orders are successfully catering to the needs of its clients.

Ø  FLIR is in an advantageous and profitable position relative to its peers due to its cost effective strategy. The company remains focused on realigning its business by closing up its non-profitable facilities and has integrated the functional ones including its optics and laser manufacturing businesses to reduce overhead costs significantly. Also, the company is taking initiatives since the last quarter to realign its businesses. It has already wrapped up a facility in France, relocated some of its assets to ensure their optimal utilization and is laying off employees at some facilities to optimize production while reducing its costs. This new structure is likely to reduce the company’s costs while driving up the profit significantly in the long-run.

Ø  The company is constantly trying to expand its businesses through various strategic acquisitions and contract-wins worldwide. In 2012, the company had acquired Lorex which excels in consumer retail Internet, professional distribution and high-volume product development. FLIR is now reaping the benefits of this acquisition. It has launched as many as 30 new products after switching the brands from Lorex to FLIR.

Ø  FLIR Systems has focused on building a strong backlog of orders from a global base of customers and shifted selling efforts from Europe to the Far East. FLIR has rationalized its operating centers, improved gross margins and introduced strategic pricing and many efficiency improvements in its businesses. FLIR's backlog was about $514 million as of Mar 31, 2014, marking an increase of $24 million during the quarter. In the quarter, the company received several new orders that include contracts from Middle East for providing several security and border protection products as well as a $30 million contract in the surveillance segment among others.

REASONS TO SELL

Ø  Contracts or subcontracts with U.S. government agencies usually fetch substantial revenue for the company. Hence, any significant reduction in the government budget is likely to damage the company’s revenue stream through negatively affecting the product sales. FLIR’s revenue from its government division declined to 39% in 2013 from 45% in 2012 due to significant drop in volume and unfavorable product mix. In the quarter, the company’s revenues from U.S. government declined by 8% owing to the continued sluggishness in the government-funded businesses. Also the company’s lead time for licensing the orders have increased leading to a lengthy order acceptance period which is likely to impact the company’s top line negatively.

Ø  Government contractors like FLIR need to follow certain procurement rules and regulations which are subject to regular audits and investigations by U.S. government agencies. Hence, there always remains a risk of failure to comply with such rules which in turn, would lead to reductions in the value of contracts, contract revision or even terminations. The assessment of penalties and fines and/or suspension or debarment from government contracting or subcontracting thereafter, will continue for a period of time or permanently.

Ø  In addition, the risk of strong competition from various big and small industry players would also affect FLIR’s profitability in the quarters ahead. Hence, the company has to reduce its selling price, production costs and raise its financial base to compete in the industry. Moreover, the company has to continuously upgrade technology to reduce costs to maintain its competitive edge. In the quarter, the company unveiled its novel a mini bullet thermal camera which claims to be one of the most pocket friendly devices in the domain.

Ø  General economic uncertainty and political turmoil are continuously hampering the company’s top-line growth. The recent unrest between Russia and Ukraine can impact the company’s business significantly as a considerable portion of company’s export business is based in Russia. If the situation persists, the increasing trade restrictions would prove to be headwind fir the company going forward.

RECENT NEWS

Fluor Misses on Q1 Earnings and Revs- May 2, 2014

Fluor Corporation reported 1Q14 results yesterday on May 1, after market closed. The company reported first-quarter net earnings of $149 million or $0.92 per share, missing the Zacks Consensus Estimate of $0.96 by 4.2%. Quarterly earnings were also down 9.8% year over year.

Profits during the quarter were impacted by continued weakness in many of the company’s end markets.

Total Revenue

Total revenue for the first quarter came in at $5.4 billion compared with $7.2 billion in 1Q13, reflecting a substantial 25.1% decline. The contraction was primarily attributable to the sluggish performance of the mining and metals business under the Industrial & Infrastructure segment. Revenues fell short of the Zacks Consensus Estimate of $6.6 billion.

In the reported quarter, the company inked contracts worth $10.7 billion. This included $8.8 billion in the Oil & Gas segment, $924 million in Industrial & Infrastructure and $748 billion in the Government segment. Consolidated backlog was $70.2 billion at quarter-end, up from $37.5 billion in the 1Q13.

Segment Revenue

Revenues from the Oil & Gas segment were flat year over year at $2.7 billion. New awards for the segment totaled $8.8 billion, including a portion of the engineering, procurement and construction of an LNG project in Canada, as well as a major clean fuels refinery project in Kuwait, a refinery expansion in Canada, a pipeline project in Mexico and a chemicals project in Malaysia. At the end of the quarter, backlog for the Oil & Gas segment grew 38%, from $18.6 billion a year ago to $25.7 billion.

Revenues in the Industrial & Infrastructure segment came in at $1.7 billion, down 45.2% from $3.1 billion a year ago. Lower revenues reflect a decline in contributions from the mining and metals business line, partly offset by growth in the infrastructure and industrial services business lines. New awards for the first quarter amounted to $924 million, including additional scope on a copper project in Peru and an iron ore facility in Australia. Backlog for the quarter was $9.9 billion, down 38.1% from $16.0 billion a year ago, attributable to substantially lower new awards for mining and metals over the past year.

Revenues in the Government segment were down 21% to $593 million, due to the reduction in LOGCAP IV task order volume. New awards totaled $748 million for the quarter, including a five-year contract to maintain the United States’ Strategic Petroleum Reserve for the Department of Energy. Backlog at the end of the quarter was $2.6 billion, up from $2.4 billion recorded in the last quarter.

Revenues in the Global Services segment declined marginally to $143 million. Lower results in the quarter were attributable to reductions in the equipment business line’s activities in the mining sector in Africa and Latin America.

The Power Group segment reported a 34% decline in revenues for the quarter to $251 million compared with $383 million a year ago, as two solar projects and a gas-fired power plant are nearing completion. New awards for the quarter totaled $166 million compared with $448 million in the 1Q13. Backlog at the end of the first quarter was $1.9 billion, which was flat year over year.

Balance Sheet

Exiting the quarter, cash and marketable securities, amounted to $2.6 billion versus $2.7 billion as of Dec 31, 2013. Long-term debt remained unchanged at $496 million. Shareholders’ equity was $3.7 billion.

Revised Outlook

Concurrent with the first-quarter earnings release, Fluor lowered the higher end of its earnings guidance. The company now expects earnings to be in the range of $4.10 to $4.45 a share compared with $4.10–$4.60 per share mentioned earlier. However, Fluor is positive about its strong prospects for continued growth, especially in Oil & Gas.


VALUATION

FLIR Systems’ current trailing 12-month earnings multiple is 26.6x compared with the 18.9x average for the peer group and 18.3x for the S&P 500. Over the last five years, FLIR’s shares have traded in the range of 12.7x to 28.3x trailing 12-month earnings.

We have downgraded our recommendation to Neutral from Underperform on FLIR Systems. The competitive environment and economic disruptions are expected to hamper the smooth running of the company’s business. Besides, government budgetary constraints, funding delays and strict regulatory compliance remain headwinds. However, the company has a well-diversified business spread across geographies, products and markets. FLIR’s core strength of low price, highest quality products and service stand the company in good stead.

Our target price is $35.00, or 23.6x 2014 EPS.

Key Indicators


Earnings Surprise and Estimate Revision History

DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of FLIR. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1092 companies covered: Outperform - 16.8%, Neutral - 75.7%, Underperform – 6.7%. Data is as of midnight on the business day immediately prior to this publication.

Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.