Despite lingering supply chain issues, the global market for electronic components is expected to continue rising throughout 2022 and well beyond, a factor that bodes well for companies within the industry such as OSI Systems (Nasdaq: OSIS). And with OSI’s stock recently trading down, now may be the perfect opportunity for long-term investors to jump in.
OSI Systems is a manufacturer of specialty electronic systems and components used for homeland security, as well as the healthcare and defense and aerospace industries. Yet, despite the strength of demand for electronic components, as the sector has recently experienced a significant decline, OSI’s stock has experienced an even more pronounced decline – even after reporting second quarter earnings slightly above analysts’ expectations.
“Given the challenging global backdrop, we were pleased with the Security division performance. The evolving pandemic as well as ongoing supply chain issues have adversely impacted the division. We continue to work through these related challenges with our customers and partners and are well positioned in the global marketplace to capitalize on future opportunities,” said OSI’s CEO Deepak Chopra on the company’s most recent earnings call in January.
However, he noted that OSI Systems’ healthcare division was down from the previous year when the onset of the COVID-19 pandemic led to a spike in demand for medical supplies across the board.
Muddy Waters and Albania law suit
The company, however, is not without its red flags. In recent years, Muddy Waters CEO Carson Waters has been a vocal opponent of OSI Systems, famously calling it “rotten to the core” over what he alleges were multiple instances of misrepresentation and possible corruption within the company. Following on from Waters’ assertions, a class action suit was filed against OSI Systems alleging that its executives made false and misleading statements and that they failed to reveal that the cost of a contract with Albania through its S2 subsidiary was intentionally inflated in order to pay off Albanian officials, among other alleged illegal acts.
Shareholders alleged that executives’ handling of the Albanian situation, among other alleged illegal acts highlighted by Waters, opened OSI’s investors to potential losses related to the possibility of both civil and criminal liability. OSI’s attorneys recently announced a proposed $12.5 million cash settlement of the suit, with a hearing on the matter set for early May which has received preliminary approval. Another thing that may have given some investors pause is the recent sale of more than $4 million worth of shares by OSI insiders.
Security industry demand poised to spike
Red flags aside, however, industry observers believe that over the long-term OSI Systems is positioned to benefit from ever-increasing global demand for electronic components, particularly in the areas of security and healthcare.
“OSI has exposure to a number of end markets that will see strong demand tailwinds in general in the years ahead, particularly healthcare and manufacturing, which have been exploding from a demand perspective and are not showing any signs of slowing down,” said Luke LeSaffre, chief revenue officer of Fusion Worldwide, a global open market sourcing distributor for electronic products.
Analysts predict that the global market for electronic components will reach $600.3 billion by 2027, up from $435.5 billion in 2020. If that holds true, industry experts believe that OSI Systems will be well positioned to take advantage of such growth. “The market for electronic components is among the quickest-growing market sectors all around the world. An ever-increasing number of digital consumers are now saying that having access to the latest products in a specific technology if of high importance to them,” said Charlotte Robinson, a senior electrical engineer whose blog, Zeebox, covers the industry.
Supply chain problems could help OSI Systems
Ongoing supply chain issues are also poised to help OSI’s long-term prospects. “The backdrop of the coronavirus resurfacing in China is going to keep inflation high, as well as a shortage of certain commodities and raw materials….this creates demand for electronic components that are locally manufactured here in the U.S.,” said Sankar Sharma, a market strategist and founder of RiskRewardReturn.com, “Most of OSI Systems’ revenue is generated in North America….This is an established company with 24 plus years in the industry, a $1.48 billion market cap and a PE ratio of less than 19x. This is an undervalued stock… Our forecast suggests that is has potential to reach $90 in the medium term,” he said.
Over the past few weeks, OSI’s stock has fluctuated between the high $70 and mid-$80 range. The company’s stock closed at $84.03 in its most recent day of trading on March 17th. While that is well below the stock’s high of $112.56 on July 1, 2019, and significantly under its 52 week high of $102.24 on June 16, 2021; it is still above its 52 week low of $76.35 on February 24, 2021.
