Has FLIR Systems Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if FLIR Systems (Nasdaq: FLIR  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at FLIR Systems.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 19.6% Pass
  1-Year Revenue Growth > 12% 2.7% Fail
Margins Gross Margin > 35% 53.7% Pass
  Net Margin > 15% 14.4% Fail
Balance Sheet Debt to Equity < 50% 15.4% Pass
  Current Ratio > 1.3 5.99 Pass
Opportunities Return on Equity > 15% 13.7% Fail
Valuation Normalized P/E < 20 13.89 Pass
Dividends Current Yield > 2% 1.5% Fail
  5-Year Dividend Growth > 10% NM NM
       
  Total Score   5 out of 9

Source: S&P Capital IQ. NM = not meaningful; FLIR paid its first dividend in February 2011. Total score = number of passes.

Since we looked at FLIR Systems last year, the company has dropped two points. Slowing revenue growth and weaker net margins are responsible for the fall in score, which partially reflects the stock's 40% decline over the past year.

FLIR's heat-detection technology has obvious applications for both military and commercial sensor applications. From infrared cameras to night-vision systems, FLIR has its fingers in a variety of interesting products.

Unfortunately, though, FLIR gets a substantial portion of its revenue from military sales. With defense budget cuts looming, FLIR's reliance on U.S. government spending is a weakness. And because the company is much smaller than big contractors General Dynamics (NYSE: GD  ) and Northrop Grumman (NYSE: NOC  ) , which can better weather temporary storms, the implications for FLIR from a slowdown in government spending are much greater.

Another threat to FLIR comes from Europe. The company's CFO told The Wall Street Journal that FLIR is "deeply worried" about the economic crisis in the eurozone, given that it has significant exposure to the region. The company has raised cash to defend itself from an immediate liquidity problem that might otherwise stem from a drop in the euro, but in the longer term, FLIR would still struggle if the European situation gets worse.

These problems are serious enough that Fool contributor Sean Williams thinks that the company would make a good buyout candidate. He suggested that defense peer Lockheed Martin (NYSE: LMT  ) or navigation giant Garmin (Nasdaq: GRMN  ) , which is a competitor to FLIR's marine electronics GPS division, could make reasonable buyers.

For FLIR to improve, it ideally needs to see strength in the global economy boosting government revenue and supporting higher spending. Barring that, though, the company could take a while before it gets closer to perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

FLIR Systems isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add FLIR Systems to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of General Dynamics, Lockheed Martin, and Northrop Grumman. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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