Can FLIR Systems (FLIR) Pull A Surprise In Q2 Earnings?

FLIR Systems Inc. (NASDAQ:FLIR) is slated to report second-quarter 2016 results, before the opening bell on Jul 27.

Last quarter, the company posted a negative surprise of 6.3%. Also, the company has missed estimates in each of the last four quarters, resulting in an average negative surprise of 4.6%.

Let's see how things are shaping up for this announcement.

Factors to Consider

FLIR Systems’ diversified portfolio is one of its biggest strengths, allowing it to offset weaknesses in any single market. Additionally, the company’s restructuring initiatives, which was undertaken in 2013, have boosted its key metrics like revenue, operating income, operating margin, adjusted net income and adjusted EPS. We believe the company’s diligent restructuring activities will continue to bolster the top and the bottom in the second quarter.

In addition, FLIR Systems has devised a Commercially-Developed, Military Qualified (“CDMQ”) model which has been boosting the company’s government business over the past few quarters. During the first quarter of 2016, government sales increased 20%, thanks to the CDMQ model. Also, the DVTEL, Inc. buyout has fortified the company’s hold in end-to-end security systems and is expected to act as a growth driver in the soon-to-be reported quarter.

In addition, impressive market traction of the company’s newly launched products based on Infrared Guided Measurement and Lepton thermal camera core technologies are likely to boost the top line in the quarter to be reported. Some of the notable products launched during the second quarter include high-performance uncooled thermal camera Boson, FLIR K33 and FLIR K53 handheld cameras, the FLIR KF6 camera for fire engines and two FLIR Aerial First Responder Kits. These products are expected to boost sales in the second quarter.

Despite these positives, FLIR Systems’ financials have been severely marred by waning consumer spending and capital investments over the past few quarters. Sluggish economic growth in many of its key markets is expected to add to FLIR Systems’ challenges.

Previously, the company had announced that its gross profit is expected to remain under pressure in the first half of 2016. A host of factors including product mix changes, manufacturing cost absorption, adjustments in inventory and rise in competitive pressure in security retail channels are putting profits under pressure. Also, unfavorable product mix is expected to hurt the operating margin in second-quarter 2016 at the Surveillance segment. We believe that these short-term headwinds will limit the company’s profits during the second quarter.

This apart, currency volatility poses a major concern for FLIR Systems as it derives a major portion of its sales from outside Europe. Over the past couple of quarters, currency fluctuations have severely maligned the company’s Maritime Segment and Instruments. During the first quarter of 2016, Maritime segment’s Building & Predictive Maintenance product lines were worst hit by currency fluctuations. In addition, stringent competitive environment may compound FLIR Systems’ challenges during the quarter.

Earnings Whispers

Our proven model does not conclusively show that FLIR Systems will beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Earnings ESP for the company is currently 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 35 cents.

Zacks Rank: FLIR Systems carries a Zacks Rank #3 which increases the predictive power of ESP. However, the company’s 0.00% ESP makes surprise predictions difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies which you may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Spectra Energy Corp. (NYSE:SE) has an earnings ESP of +16.00% and a Zacks Rank #1. . The company is slated to release earnings on Aug 3.

Starz (NASDAQ:STRZA) has an earnings ESP of +8.93% and a Zacks Rank #2. The company is scheduled to report earnings on Jul 28.

CBS Corp (NYSE:CBS) has an earnings ESP of +1.16% and a Zacks Rank #2. The company is slated to release results on Jul 28.