FLIR: stimulus makes company an even more attractive investment

economic conditions. They have a low debt-to equity ratio of 0.23 which fell in 2008 and FLIR has continued to lower debt this year by allowing holders of its senior convertible notes to exchange them for equity. Even with this declining leverage, their financial statements show no sign of difficulty in collecting payments from customers.

With the stock at $21, the P/E ratio is now down to 17, about half of what it was when Konrad first looked at the company. Konrad says he recently sold puts to acquire shares if the price falls below $15.

The Other 70 percent

FLIR is not a pure-play energy efficiency stock. According to the most recent annual report, the Thermography division, which includes the energy efficiency applications discussed above, accounted for approximately 30 percent of revenues in 2008, while its Commercial Vision Systems unit accounted for 17 percent and its Government Systems unit for 53 percent.

FLIR’s Government Systems unit supplies military, police, and paramilitary with advanced infrared imaging equipment. While defense stocks as a whole may not be a safe have in this recession, some analysts see FLIR’s military supplier role as an advantage, because they expect government spending on small ticket items (as opposed to tanks and fighter jets) to remain robust. Konrad notes that he has never analyzed this sector, so he cannot take a strong position on this, but imaging systems seem to be military hardware which make a lot of sense in our current wars in Iraq and Afghanistan.

When considering an investment in FLIR, it is important to understand that the company’s primary markets are military and security, and they are likely to remain so, as all divisions are on robust growth trajectories. “Many clean energy investors may be uncomfortable with military contracting from a moral standpoint, but I feel that sensing systems are as likely to save civilian lives as they are to end them,” Konrad writes.

From a financial analysis standpoint, Konrad says, he knows that he does not understand the industry. “I can say, however, that this segment seems the safest part of the company’s business, largely because they have a large an growing backlog in the segment.” One other upside is the fact that FLIR is lumped with other military contractors and few other alternative energy investors are looking at the company. “Most of the analysts who follow FLIR specialize in military contractors… such analysts are therefore as unlikely to understand the true potential of the energy efficiency market as we are to understand the potential of the military market,” Konrad concludes.