FLIR Systems, Inc. (NASDAQ:FLIR) is a thermal imaging systems company that markets its products to commercial and government customers. Unfortunately, U.S. government-funded customers' demand for its products and services has begun to wane. But certain factors might still make FLIR Systems the best investment compared to its peers.
FLIR Systems, Inc. (NASDAQ:FLIR)'s second-quarter revenue jumped 15.1% year over year to $389.3 million, which might give you an impression that the company's knocking the cover off the ball. While it isn't doing poorly by any means, FLIR Systems stated that it owes that revenue jump mostly to its acquisitions of Lorex and Traficon late last year.
These purchases led the Thermal Vision & Management segment to increase revenue by an impressive 22.7%; without them, its revenue might not have risen at all. The Integrated Systems segment has also performed well, with revenue skyrocketing 160.1%. But in this case, its improvement stems from strong shipments, which indicates organic growth.
The good news for segments ends there. Raymarine (providing marine electronics to monitor boat speed, direction, and location) revenue dropped 0.6% year over year. While Asia-Pacific sales have stayed strong, Europe remains weak. Surveillance revenue declined 0.7%, and the segment has suffered from lower gross margins and increased operating expenses. Detection revenue plummeted 8.6%; management referred to a lack of large product orders and lower R&D contract revenue due to program timing.
Overall, international sales have declined from 55.1% of revenue (Q2 2012) to 45% of sales (Q2 2013). Management states that international sales should remain a significant portion of the company's revenue, but this is still somewhat concerning, since domestic demand is likely to diminish due to the sequester's nearly $1 trillion in military budget cuts.
FLIR Systems, Inc. (NASDAQ:FLIR)'s cost of goods sold has increased 14.8% to $193.3 million year over year, and SG&A expenses have increased 11.8% to $80.2 million. However, this is mostly due to recent acquisitions and increased revenue.
R&D expenses also moved higher, from $37.5 million to $39.6 million, and this expense is expected to remain high due to a challenging revenue environment. That might sound a little confusing, considering the company saw an impressive revenue improvement year over year. But over the past three years, the company's revenue (in millions) hasn't exactly posted steady growth:
1). 2010: $1,385
2). 2011: $1,544
3). 2012: $1,405
That's hardly an inspiring trend. However, recent acquisitions should help FLIR Systems, Inc. (NASDAQ:FLIR)'s drive top-line growth going forward.
And while revenue is the most important metric, earnings results for the past five years suggest that the company's got capable managers at the helm. Observe its diluted EPS:
1). 2008: $1.28
2). 2009: $1.45
3). 2010: $1.54
4). 2011: $1.38
5). 2012: $1.45
While we don't see an uninterrupted ascent, earnings look to be on the right track again after a downside move in 2011. And as I'll discuss in the section below, important evidence suggests that this trend will likely continue.
Also, note that FLIR Systems, Inc. (NASDAQ:FLIR) managed to stay profitable during The Great Recession. While this might have been expected given the industry, it's still a big positive, since so many companies throughout the broader market couldn't follow suit.
Bigger isn't always better
With a market cap of $4.57 billion, FLIR gets dwarfed by rivals L-3 Communications Holdings, Inc. (NYSE:LLL) and Lockheed Martin Corporation (NYSE:LMT), who carry market caps of $8.27 billion and $39.29 billion, respectively.