Despite a post-earnings pop last quarter, FLIR shares have largely been trending down this year. FLIR Total Return Price data by YCharts.

For the second quarter in a row, FLIR Systems (NASDAQ:FLIR) has reported an earnings miss. Three months ago, investors forgave FLIR's flub. This quarter -- they didn't.

The news
Reporting earnings for its fiscal third quarter Wednesday, FLIR announced the following results:

  • Quarterly revenues grew 2% year over year -- but missed analyst targets by an equal 2% -- landing at $381.9 million in Q3.
  • Operating profit margins expanded by 130 basis points to 19.9%, helping to mitigate the damage of the revenue miss.
  • A sizable $0.12 one-time tax benefit helped to further boost earnings, with the result that net income for the quarter came in at $0.52 per share -- up 40% year over year. (But absent that benefit, earnings would have grown only 8%, and missed estimates for "pro forma" profits by about $0.01).

Of course, the best news of all is the point investors are most likely to miss, and that's the fact that FLIR generated $73.6 million in positive cash flow last quarter, more than double what it produced in last year's Q3. Despite higher spending on capital investment, this left the company with $54.2 million for the quarter -- and three times more free cash flow produced.

As a result, year-to-date, FLIR has produced $147.4 million in real cash profit. That's still less than FLIR is reporting for "net income" under generally accepted accounting principles (GAAP). But it's a strong 20% increase over cash profits clocked through the first three quarters of 2014.

Valuation
Investors are reacting to FLIR's GAAP earnings miss, and its reduction in guidance, by driving FLIR shares down 4.5% (at last report) in Wednesday trading. FLIR now expects to earn at most $1.60 by year-end, whereas previously it expected to earn at least $1.60. From the perspective of existing shareholders, that's certainly bad news -- but for potential new buyers of FLIR stock, it may present an opportunity. Here's how:

At present run-rates for the free cash flow generation, FLIR looks to be on track to produce about $200 million in cash profit this year, yielding a price-to-free cash flow ratio of just 18.2 on the stock. Back out the value of FLIR's $178 million in net cash, and I calculate an enterprise value-to-free cash flow ratio of closer to 17.3 on the stock -- which is not half bad for a company growing cash profits at 20%.

Foolish final thought
The big question, of course, is how long FLIR can keep this performance up. According to analysts quoted on S&P Capital IQ, the consensus is that FLIR will grow its profits at something closer to 15% annually over the next five years. Assuming they're right, even 17 times FCF may be a bit too much to pay for this stock.

Long story short, FLIR stock has fallen far since I panned it three months ago. While I'm not quite as pessimistic about FLIR's valuation today as I was back then, the stock still isn't quite as big of a screaming Halloween bargain as I'd like to see before investing.

If you decide to buy FLIR stock at its new and improved, cheaper price, I wish you all the best. As for myself, I think the stock has further to fall -- and won't buy in until it does.

Rich Smith does not own shares of, nor is he short, any company named above. You can find him on our stockpicking boards at Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 280 out of more than 75,000 rated members.

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