This Company in The Security Industry has been a Solid Performer

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Written By Dean McHugh

OSI Systems has shown remarkable growth and value delivery to its over the last year, with shares rising over 18%.

The company, which operates in the security, optoelectronics, and healthcare sectors, has grown its sales towards the $1.5 billion mark, aided by several large security orders.

Company Overview

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OSI Systems provides advanced and reliable electronics solutions for critical applications across diversified essential markets. The company’s operations are divided into three main segments:

  1. Security: This is the largest and most profitable segment, responsible for about 60% of sales. It develops and manufactures security screening systems and solutions for governments, civil infrastructure, border and port security, among others.
  2. Optoelectronics: This segment contributes approximately 25% of sales, providing components and solutions such as photodetectors, laser diodes, and lex circuits used in a variety of applications.
  3. Healthcare: Generating about 15% of sales, this segment includes patient monitoring, cardiology, connected care, and remote monitoring solutions in healthcare settings.

Geographically, OSI Systems generates half of its sales in the U.S., with the remainder coming from the EMEA region, APAC, and other parts of the Americas.

Financial Performance and Growth

Back in 2016, OSI Systems had just completed a decade-long period of growth, doubling its sales and achieving adjusted earnings of $3 per share. Shares were trading at a relatively modest $50, partly due to some operational hiccups and a troubled acquisition.

Since then, the company has significantly improved its performance:

  • Sales Growth: From around $1 billion in 2016 to $1.3 billion in 2023.
  • Earnings Growth: Earnings have doubled to $6 per share over this period.

Despite the fluctuations, shares of OSI Systems traded between $50 and $100 until the spring of the previous year when they rose to $145, reaching all-time highs.

Recent Performance

In August of last year, OSI Systems reported its fiscal 2023 results, showcasing strong growth:

  • Full Year Revenues: Up 8% to $1.28 billion.
  • Operating Profits: Operating profits were $121 million, with GAAP earnings of $6.45 per share, though this included a one-time gain from property sales. Adjusted earnings were $5.81 per share, slightly down from the previous year.

The company operated with a net debt of $288 million, a manageable amount, and projected significant improvements for fiscal 2024, with expected revenue growth of more than 18% and adjusted earnings growth of over 25%.

Quarterly Performance

  • First Quarter: Sales increased by 4% to $279 million, with adjusted earnings up modestly to $0.91 per share.
  • Second Quarter: Sales surged by 26% to $373 million, with adjusted earnings jumping to $2.21 per share.
  • Third Quarter: Sales rose 34% to $405 million, with adjusted earnings up 45% to $2.16 per share.

With strong growth in 2024, the company’s backlog remained constant at $1.8 billion, providing a solid foundation for future performance.

Segment Analysis

The security segment has been the primary driver of OSI Systems’ recent success, with revenues increasing by 42% to $700 million, now accounting for two-thirds of total sales.

However, the optoelectronics and healthcare divisions have experienced declines in both sales and margins. This divergence highlights the potential for OSI Systems to streamline its focus on the more profitable and faster-growing security segment.

Valuation and Future Prospects

With 17.4 million shares trading at $145, OSI Systems’ equity is valued at $2.52 billion, translating to an enterprise valuation of $2.77 billion. This places the company’s valuation at less than 2 times sales, with shares trading at 19 times earnings. Given the company’s net leverage of around 1.5 times, the current valuation appears reasonable.

However, the company’s growth has been driven significantly by large security orders, which may not be sustainable in the long term. The potential for a decline in sales next year is a concern, despite the consistent backlog.

Furthermore, growth in other segments has been lackluster, indicating that the company needs to create more value in these areas to sustain its current momentum.

OSI’s Potential and Risks

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OSI Systems has demonstrated impressive growth and strong financial performance, particularly in its security segment. However, the company’s reliance on large orders and the underperformance of its optoelectronics and healthcare segments pose risks.

While the current valuation is appealing, caution is warranted given the potential for normalization in fiscal 2025 and the need for continued robust order intake.

Investors should closely monitor the company’s performance in the coming quarters, particularly its ability to sustain growth in the security segment and improve its other segments.

For now, it may be prudent to adopt a cautious stance, considering the potential risks and uncertainties.


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