OSI Systems (OSIS)

Security and healthcare technology company OSI Systems (NASDAQ:OSIS) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 11.8% year on year to $384.6 million. The company’s full-year revenue guidance of $1.85 billion at the midpoint came in 1.1% above analysts’ estimates. Its non-GAAP profit of $1.42 per share was 3.1% above analysts’ consensus estimates.

Company Overview

With security scanners deployed at airports and borders worldwide and patient monitors used in hospitals across the globe, OSI Systems (NASDAQ:OSIS) designs and manufactures specialized electronic systems for security screening, patient monitoring, and optoelectronic applications.

Companies in this sector, especially if they invest wisely, could see demand tailwinds as the world moves towards more IoT (Internet of Things), automation, and analytics. Enterprises across most industries will balk at taking these journeys solo and will enlist companies with expertise and scale in these areas. However, headwinds could include rising competition from larger technology firms, as digitization lowers barriers to entry in the space. Additionally, companies in the space will likely face evolving regulatory scrutiny over data privacy, particularly for surveillance and security technologies. This could make companies have to continually pivot and invest.

OSI Systems' Security division competes with Smiths Group (LSE:SMIN), Leidos (NYSE:LDOS), and L3Harris Technologies (NYSE:LHX) in the security screening market. In healthcare monitoring, the company faces competition from Philips (NYSE:PHG), GE HealthCare (NASDAQ:GEHC), and Medtronic (NYSE:MDT). The Optoelectronics division competes with companies like TE Connectivity (NYSE:TEL) and Amphenol (NYSE:APH).

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $1.75 billion in revenue over the past 12 months, OSI Systems is a mid-sized business services company, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the bright side, it can still flex high growth rates because it’s working from a smaller revenue base.

As you can see below, OSI Systems grew its sales at an impressive 9.2% compounded annual growth rate over the last five years. This is an encouraging starting point for our analysis because it shows OSI Systems’s demand was higher than many business services companies.

Long-term growth is the most important, but within business services, a half-decade historical view may miss new innovations or demand cycles. OSI Systems’s annualized revenue growth of 16.6% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

We can dig further into the company’s revenue dynamics by analyzing its most important segment, Security. Over the last two years, OSI Systems’s Security revenue (inspection systems) averaged 27.4% year-on-year growth. This segment has outperformed its total sales during the same period, lifting the company’s performance.

This quarter, OSI Systems reported year-on-year revenue growth of 11.8%, and its $384.6 million of revenue exceeded Wall Street’s estimates by 4.9%.

Looking ahead, sell-side analysts expect revenue to grow 5.3% over the next 12 months, a deceleration versus the last two years. Still, this projection is above the sector average and implies the market is baking in some success for its newer products and services.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

OSI Systems has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 11.4%, higher than the broader business services sector.

Looking at the trend in its profitability, OSI Systems’s operating margin rose by 2 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q3, OSI Systems generated an operating margin profit margin of 8.6%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

OSI Systems’s EPS grew at a spectacular 14.9% compounded annual growth rate over the last five years, higher than its 9.2% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of OSI Systems’s earnings can give us a better understanding of its performance. As we mentioned earlier, OSI Systems’s operating margin was flat this quarter but expanded by 2 percentage points over the last five years. On top of that, its share count shrank by 4.7%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For OSI Systems, its two-year annual EPS growth of 23.4% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q3, OSI Systems reported adjusted EPS of $1.42, up from $1.25 in the same quarter last year. This print beat analysts’ estimates by 3.1%. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

OSI Systems broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although OSI Systems has shown solid business quality lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 11%, somewhat low compared to the best business services companies that consistently pump out 25%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, OSI Systems’s ROIC increased by 1.5 percentage points annually over the last few years. its rising ROIC is a good sign and could suggest its competitive advantage or profitable growth opportunities are expanding.

OSI Systems reported $124.4 million of cash and $694.3 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $299.5 million of EBITDA over the last 12 months, we view OSI Systems’s 1.9× net-debt-to-EBITDA ratio as safe. We also see its $31.47 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing OSI Systems beat analysts’ revenue expectations this quarter. We were also glad its full-year revenue guidance slightly exceeded Wall Street’s estimates. Overall, we think this was a decent quarter with some key metrics above expectations. The stock traded up 2.2% to $248.80 immediately following the results.

Updated: December 3, 2025 at 10:12 PM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

There are multiple reasons why we think OSI Systems is an amazing business. For starters, its revenue growth was impressive over the last five years. And while its low free cash flow margins give it little breathing room, its spectacular EPS growth over the last five years shows its profits are trickling down to shareholders. Additionally, OSI Systems’s projected EPS for the next year implies the company will continue generating shareholder value.

OSI Systems’s P/E ratio based on the next 12 months is 25x. Looking at the business services landscape today, OSI Systems’s fundamentals really stand out, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $295 on the company (compared to the current share price of $273.19), implying they see 8% upside in buying OSI Systems in the short term.