When FLIR Systems (Nasdaq: FLIR) announced in August that it was buying ICx Technologies, I praised the decision. Bargain-priced and enhancing FLIR's own ability to partner with larger government contractors like Honeywell (NYSE: HON) and Northrop Grumman (NYSE: NOC), it seemed a great deal. It did, however, come at a cost.

Buying a company entails a whole host of expenses for the acquirer: Lawyers and auditors must be paid to conduct due diligence, "acquisition premiums" must be amortized over time -- all of which puts pressure on profit margins. And so it was that even as FLIR reported 16% revenue growth this morning, it also admitted that profits per diluted share grew only a penny, to $0.39 per share. Fortunately for FLIR shareholders, investors appear willing to overlook that temporarily anemic growth rate, just as they happily forgave FLIR's sizeable "miss" on Q3 revenue targets. As for me, though, I'm not feeling so generous. Here's why:

Firstly, because FLIR's backlog of business to be done over the next 12 months -- the best predictor I know of where sales are trending -- has dropped to $533 million. (FLIR notes that it's up since last quarter, and that's true. But after the first quarter of this year, backlog stood at $543 million.)

Although FLIR inexplicably declined to provide its shareholders with a full cash flow statement in its release (requiring us to wait for the 10-Q to come out to get the full story -- tsk, tsk), management did deign to tell us half the story. Year to date, cash flow from operations at FLIR rose to $209.9 million, suggesting a full-year run-rate of $280 million.

Now, if we assume that capex continues at the rate that it was last reported at the end of Q2, this should leave FLIR generating roughly $192 million in free cash flow this year, significantly short of the company's promised net profit for the year. And I wonder: When you've got any number of big defense contractors reporting free cash flow that equals or exceeds their reported net income -- Boeing (NYSE: BA), United Technologies (NYSE: UTX), General Dynamics (NYSE: GD) to name a few -- why buy a lower quality company that cannot do the same? Also, even if cash flow comes in better than expected (their capital expenditures can be fairly lumpy, so the run rate could come in below my projections), there's still reason to be wary.

After all, the company's current market cap of $4.2 billion tells me that FLIR is selling for about 20 times trailing free cash flow. Assuming management succeeds in meeting analysts' consensus forecast for 14.2% long-term growth, therefore, I'd have to say that the shares look richly priced. My hunch: Once investors come to the same conclusion, today's rally in the stock will flame out.

General Dynamics is a Motley Fool Inside Value pick, but Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.

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