Explosive Growth From Critical Moves And Innovation Will Propel Future Earnings And Margins

Key Takeaways

• Strong security division growth and strategic acquisitions suggest enhanced future revenue and earnings potential.
  
• Operational expansion and financing strategies may boost margins and revenue across key business divisions.
  
• Supply chain disruptions, inflation, and leadership changes pose risks to margins, cash flow, and operational performance, with potential delays in international security contracts impacting earnings.

Catalysts

Designs and manufactures electronic systems and components.

• The Security division experienced a 36% year-over-year increase in revenues, indicating strong demand and future growth prospects, which is likely to enhance future revenue and operating income.
  
• A healthy backlog of $1.8 billion and continued strong bookings provide good visibility for revenue growth in the upcoming quarters.
  
• The completion of a strategic acquisition in the Security division is expected to be accretive to fiscal '25 non-GAAP earnings per share, indicating potential for earnings growth.
  
• The company achieved a reduced weighted average cost of borrowings through a convertible net financing of $350 million, which is expected to positively impact net margins due to lower interest expenses.
  
• Expansion of operations in key areas such as Mexico, utilization of nearshoring opportunities, and increased involvement in defense electronics and advanced medical devices through the Optoelectronics division are likely to drive revenue growth and improve operating margins.

OSI Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming OSI Systems's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.3% today to 9.8% in 3 years time.
• Analysts expect earnings to reach $184.5 million (and earnings per share of $10.31) by about November 2027, up from $133.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.4x on those 2027 earnings, up from 19.3x today. This future PE is lower than the current PE for the US Electronic industry at 23.4x.
• Analysts expect the number of shares outstanding to grow by 2.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.76%, as per the Simply Wall St company report.

OSI Systems Future Earnings Per Share Growth

Risks

• The company noted that any disruptions in the supply chain and inflation could vary significantly from the anticipated impact currently reflected in their guidance, which could affect margins and cash flow.
  
• Changes in government funding or geopolitical unrest could delay large international security contracts, impacting revenue conversion rates and future earnings.
  
• Economic conditions globally are a potential risk to the business, which may affect revenue and operational performance if contracts are delayed or customers reduce spending.
  
• There’s a reliance on significant international security contracts with milestone-triggered billings, potentially impacting short-term cash flow and increasing days sales outstanding (DSO) if there are delays.
  
• The company’s leadership transition, with the CEO retiring and a search for a successor underway, may introduce operational risks or strategic shifts, potentially affecting execution and financial performance.

Valuation

• The analysts have a consensus price target of $176.67 for OSI Systems based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.9 billion, earnings will come to $184.5 million, and it would be trading on a PE ratio of 20.4x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $153.79, the analyst's price target of $176.67 is 12.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.