Big New Deal Sparks Hefty Gains for FLIR Systems (NASDAQ:FLIR)

For anyone who's watched a ghost hunting show any time in the last five to 10 years, the name FLIR Systems (NASDAQ:FLIR) is probably familiar. FLIR is the maker of thermal imaging systems, including those commonly waved around by ghost hunters looking for shifting thermal patterns in the air that may—or perhaps more likely may not—indicate the presence of ghosts in the area. Now, FLIR is making a new move of its own, as it's about to be bought out by a whole new operation.

One Hefty Price Tag

The latest deal for FLIR is that it's to be bought out by Teledyne Technologies (NYSE:TDY), who will be shelling out a hefty $8 billion to pick up the thermal imaging powerhouse. The deal is to be carried out in a combination of Teledyne stock and cash outright, and values FLIR at around $56 per share. Given that FLIR closed trading last Thursday at $43.83—and has made substantial gains since—that's a healthy premium.

It's also a deal that's drawing its share of controversy along with it. Reports suggest that Johnson Fistel, a law firm focused on shareholder rights—has turned its attention toward the deal, investigating whether or not FLIR has faltered on its duty to shareholders with the deal. That may sound outlandish, given the kind of premium that FLIR realized on the deal, but the reports suggest that FLIR may not have “adequately pursued alternatives to the acquisition”, and quite possibly may not have realized the best possible price for its shares. Only the completed investigation will tell for sure, but on the surface, the charges seem difficult to prove at best.

The Analysts Spot a Hot Buy

While FLIR's primary stock in trade is thermal imaging systems, a thermal camera isn't necessary to spot this company as a hot buy. No, the analyst community has done that much for us, or so our latest research reveals. FLIR has actually been considered a “buy” for the last six months, though the consensus rating seems to have plateaued three months ago.  Six months ago, the company had one “sell” rating, three “hold,” four “buy” and one “strong buy.” Three months later, the company went to one “sell” rating, two “hold”, four “buy” and one “strong buy.” It then held that ratio for the next three months up until the present day.

Oddly enough, the price target has slipped before plateauing. Six months ago, the price target was $51 per share. Three months later, it dropped, slightly, to $50.14, where it has remained ever since, despite the current share price of $52.23 as of this writing. However, given that the stock has been trading in the mid-$30 to mid-$40 range since about mid-June, a prediction of $50.14 looks downright prescient.

Just How Hot Is It?

So right now, the analyst community seems to be quite in on the notion of FLIR as a buy, and with Teledyne stepping in to buy the whole company outright, it's easy to agree with so much positive outlook. A report from a couple weeks ago actually lends more credence to the notion of FLIR as a buy.

Reports from back then noted that FLIR was looking to get into the autonomous vehicle market, and with good reason. It wasn't planning to be a carmaker, but rather, it was looking to offer up its line of thermal cameras and the like to be used with such vehicles. The concept makes plenty of sense; think about all the times you've been driving with impaired vision, and how handy a system would be that can detect heat sources through visual impairments. Fog, smoke, haze...these things mean little to FLIR cameras, which can spot heat sources accordingly through even the densest visual-blocking conditions. Since fog and smoke and such are comparatively constant temperatures, they're just a solid field to a FLIR camera, which can readily spot a much warmer vehicle in the middle of a field of constant temperature.

That's a potentially big new market, and when you add in what Teledyne already does, the whole picture makes even more sense. Teledyne has four major business segments, at last report: engineered systems, instrumentation, aerospace / defense, and digital imaging. It's the third and fourth on that list that make the most sense; FLIR systems would have a range of uses in aerospace and defense applications, and pretty much everything a FLIR camera does would fall under “digital imaging.”

So now, Teledyne gets a big new set of applications that match what it's already doing, which makes it more appealing to its current customer base, and also gets access to the current range of FLIR customers, to which Teledyne can offer up its own slate of solutions. That's a lot of benefit for Teledyne, which explains why it was willing to offer up such a premium to get its hands on FLIR. That also explains why Johnson Fistel is looking into the deal, and why both FLIR and Teledyne are looking like solid additions to a portfolio right now.