Pat Dollard | Young Americans

BY MARILYN ALVA (IBD)

Talk about multitasking.

Flir Systems’ (FLIR) products can help fight wars at night, spot intruders, secure borders, detect gas leaks and measure moisture in walls.

Thanks to the way it has leveraged its core strength in infrared technology, Flir offers customers the means to perform all of those tasks and more.

All branches of the U.S. military have signed on. So have foreign governments, security outfits, utility firms, building inspectors and automakers.

On Thursday, Flir announced a $6.7 million order from the Colombian government for multisensor surveillance systems for use on airplanes engaged in counternarcotic and counterterrorism missions.

As a pure-play leader in infrared technology, Flir sells a wide gamut of night-vision devices, sensors and camera systems.

Prices range in the millions for a complex camera system to as little as $3,000 for an off-the-shelf thermal imaging tool that a building inspector can use.

All-Encompassing Strategy

“Their core technology supports all of their business units,” said Michael Ciarmoli, an analyst at Boenning & Scattergood. “The strategy is to drive volumes across all business units.”

The biggest block of orders comes from the government, especially the Defense Department.

Defense spending under the Bush administration has played into Flir’s hand. And new contracts keep rolling in.

In late May, Flir announced its largest contract ever, a $358.4 million add-on sensor system for the U.S. Army and Missile Defense Command.

First-quarter government-related revenue jumped 40% from the same period last year to $113.7 million. It made up 48% of overall revenue.

Thermography products — thermal imaging systems that detect and measure minute temperature differences — accounted for 34% of the total. They are used in industrial, commercial and residential markets for such things as leak detection and testing and measurements.

That business in the first quarter grew 47% from last year to $79.5 million. Commercial vision systems made up 18% of the total. Sales there jumped 66.8% from a year ago to $43.7 million.

Flir reaped rewards from defense technology spending on such things as ground sensors to secure perimeters and night-vision aids for soldiers and unmanned weapons stations.

“Flir’s playing to the (military’s) sweet spot,” Ciarmoli said.

But might that sweet spot turn sour under a new administration, especially one led by a Democrat?

Ciarmoli doesn’t think so. The military will continue to transition from Cold War-era gear and tactics to modern innovations such as unmanned combat systems that rely on infrared technology, he says. “The focus on spending will shift from war to modernization for a new state of readiness.”

The military considers troop protection systems such as Flir’s perimeter-monitoring cameras effective tools, says analyst Jeff Rosenberg of William Blair.

“The real driver is (the military’s) increased willingness to look at commercial solutions,” he said. “That trend is not likely to be affected by an administration change.”

About half of Flir’s business doesn’t come from the government at all. For example, its night-vision products are sold to auto and maritime customers, among others.

“None of these other areas have fully developed their use of infrared,” Rosenberg said. “It’s a classic elasticity opportunity. There are a lot of growth opportunities in the other half of the business, too.”

Pent-up demand for products to help secure borders, airfields, seaports, nuclear plants, power stations and oil refineries offers plenty of potential, Ciarmoli says.

Chief Executive Earl Lewis, who was unavailable to comment for this story, said in a conference call that Flir intends to go after untapped markets aggressively. One way: by reducing costs.

If Flir’s prices keep coming down, all the better for pushing volume up, analysts say.

Price declines are a function of new technology and the rollout of lower-priced products.

In early May, Flir said it would launch a 12-ounce handheld infrared thermal imaging camera priced at 30% to 40% below its lowest-cost model.

As of March 31, Flir’s backlog was already strong. Firm orders for delivery within the next 12 months stood at $471 million. That was $78 million more than in the earlier year. The government arm made up $371 million of that backlog.

“The backlog coverage for the next 12 months is as good as it’s ever been,” Rosenberg said.

The company reaffirmed its 2008 outlook: revenue of $1 billion to $1.05 billion, which would be up about 35% from 2007, and full-year earnings of $1.13 to $1.20 a share, a jump of 27% to 35%.

Earnings Estimates

Analysts tracked by Thomson Reuters expect 2008 earnings of $1.19 a share, at the high end of guidance. They see 20% earnings growth in 2009 and 11% in 2010.

“They have great operating metrics and lead their peer group in margins and profitability metrics,” Ciarmoli said.

The bulk of Flir’s operating income comes from government business. Rivals include units of defense contractors such as Raytheon (RTN) and L-3 Communications (LLL) and smaller firms such as Axsys Technologies. (AXYS)

In infrared technology, “Flir is the 800-pound gorilla in the space,” Ciarmoli said.

But in a May report, he noted that new entrants with compelling solutions, such as Axsys, “may begin to grab some of Flir’s lucrative high-margin government business.”