What’s The Upside For FLIR Systems Stock?

Despite rising 2x from its low in March, we believe FLIR Systems stock (NASDAQ: FLIR) has room for further upside. FLIR, a designer and producer of imagining components and sensors, has seen its stock price roughly unchanged since the start of 2020, currently trading at around $53. Further, it traded at $58 in February 2020 – just before the outbreak of coronavirus – and is currently almost 10% below that level. With rising demand and steady Q3 2020 earnings, we believe that the stock has the potential to gain around 10% from the current price near $53, to regain its pre-Covid levels. Our conclusion is based on our comparative analysis of FLIR stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/24/2020: S&P 500 recovers 70% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how FLIR stock and the broader market fared during the 2007-08 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

FLIR and S&P 500 Performance Over 2007-08 Financial Crisis

We see FLIR stock declined from levels of around $35 in September 2008 (pre-crisis peak) to levels of around $20 in March 2009 (as the markets bottomed out), implying FLIR stock lost around 40% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of around $33 in early 2010, rising by 60% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.

FLIR Fundamentals Over Recent Years

FLIR revenues increased from $1.7 billion in 2016 to $1.9 billion in 2019, due to higher revenues across all revenue segments. Along with higher revenue, earnings also rose marginally, with EPS rising from $1.22 to $1.27 during this period.

Does FLIR Have Enough Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

FLIR’s total debt rose from $517 million in 2016 to $661 million in 2019, while its total cash dropped from around $361 million to $285 million over the same period. Further, the company generated around $370 million cash from operations in fiscal 2019. This steady cash position combined with strong cash from operations provides the company a reasonable cushion to deal with the current crisis.

Conclusion

Phases of Covid-19 Crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Despite the recent surge in the number of new Covid-19 cases in the U.S., we see the rise in demand continuing in the near to medium term. This is evident from FLIR’s Q3 2020 results, where revenues came in at $466 million, only marginally lower than the $471 million in Q3 2019. The company was able to control costs across all operating expense heads, which ensured that EPS came in at $0.46, the same as in Q3 2019. We believe that FLIR stock has potential upside in the near term, and even as the lockdowns are gradually lifted, a drop in imaging sensor and equipment demand does not seem very likely. This could see FLIR stock potentially rise around 10% from its current level.

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