- The current price multiples.
- The consistency of past earnings and cash flow.
- How much growth we can expect.
We'll look at the numbers against some competitors and industry mates: L-3 Communications Holdings (NYSE: LLL ) , Lockheed Martin (NYSE: LMT ) , and Honeywell International (NYSE: HON ) .
The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share -- the lower, the better.
Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.
Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.
FLIR has a P/E ratio of 18.5 and an EV/FCF ratio of 29.9 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, FLIR has a P/E ratio of 19.9 and a five-year EV/FCF ratio of 23.3.
A positive one-year ratio under 10 for both metrics is ideal (at least in my opinion). For a five-year metric, under 20 is ideal.
FLIR ! has a mi xed performance in hitting the ideal targets, but let's see how it compares against some competitors and industry mates.?
Company | 1-Year P/E | 1-Year EV/FCF | 5-Year P/E | 5-Year EV/FCF |
|---|---|---|---|---|
| FLIR Systems | 18.5 | 29.9 | 19.9 | 23.3 |
| L-3 Communications Holdings | 7.1 | 7.4 | 7.7 | 7.7 |
| Lockheed Martin | 8.8 | 11.3 | 8.9 | 9.4 |
| Honeywell International | 15.7 | 25.0 | 18.3 | 14.5 |
Source: S&P Capital IQ.
Numerically, we've seen how FLIR's valuation rates on both an absolute and relative basis. Next, let's examine...The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.
In the past five years, FLIR's net income margin has ranged from 13.7% to 20.6%. In that same time frame, unlevered free cash flow margin has ranged from 8.2% to 22.2%.
How do those figures compare with those of the company's peers? See for yourself:
Source: S&P Capital IQ; margin ranges are combined.
Additionally, over the last five years, FLIR has tallied up five years of positive earnings and five years of positive free cash flow.Next, let's figure out...
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.
Let's start by seeing what this company's done over the past five years. In that time period, FLIR has put up past EPS growth rates of 16.5%. Meanwhile, Wall Street's analysts expect future growth rates of 14.8%.
Here's how FLIR compares to its peers for trailing five-year growth:
Source: S&P Capital IQ; EPS growth shown.
And here's how it measures up with regard to the growth analysts expect over the next five years:
Source: S&P Capital IQ; estimates for EPS growth.
The bottom lineThe pile of numbers we've plowed through has shown us the price multiples shares of FLIR?are trading at, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.
The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at an 18.5 P/E ratio, and we see that its price multiples are elevated for companies linked to the defense industry. Its multiples are higher than each of its comps.
However, looking at margins and growth over the last five years, FLIR also beats L-3, Lockheed, and Honeywell. On an absolute basis, its margins are quite impressive.
Although FLIR's price multiples ! are expe nsive, its operational numbers could justify them. Our CAPS community rates FLIR four stars out of five despite the uncertainty of defense budgets. But these initial numbers are just a start. If you find FLIR's numbers or story compelling, don't stop. Continue your due diligence process until you're confident one way or the other. As a start, add it to My Watchlist to find all of our Foolish analysis.
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