SEC, DOJ Investigations Weigh On OSI Systems Valuation, Jefferies Says In Downgrade

OSI Systems, Inc. OSIS, a provider of security and inspection systems, disclosed in a recent 8-K filing that the SEC and DOJ are both investigating the trading of its securities.

The disclosure was made following the release of its fiscal year 2018 second-quarter results after the close on Thursday.

The Analyst

Jefferies analyst Sheila Kahyaoglu downgraded shares of OSI Systems from Buy to Hold and lowered the price target from $79 to $70.

The Thesis

The two investigations could result in the shares of OSI Systems remaining rangebound until a final outcome, Kahyaoglu said in a Friday note. (See the analyst's track record here.) 

Resolutions could take more than a year and weigh on valuation, the analyst said. 

Reviewing the Q2 results released Thursday, Kahyaoglu said adjusted earnings per share exceeded estimates and revenues rose 14 percent, with security revenues climbing 9 percent organically.

"Management noted broad demand for its security products, including a recent win for RTT screeners in Panama," she said. 

OSI Systems raised the 2018 earnings per share guidance by 1 percent to $3.45-$3.67, the analyst said. 

A recent renewal of OSI Systems' Mexico turnkey contract lowers project revenues from $120 million to $65 million. The project accounts for 12 percent of total revenues, meaning the drop in contract value puts pressure on the 2019 consensus EPS estimate of $3.89.

The Price Action

OSI Systems shares were down about 11 percent over the year through Thursday.

The stock was plunging 18.26 percent to $54.44 at the time of publication Friday. 

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