Investors See Security-Scanner Company as Safe Bet

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OSI Systems, a security scanner manufacturer in Hawthorne, got two bits of good news last week. The value of a big contract more than doubled. And a new government report indicated OSI-like scanners don’t pose a health risk.

The news made OSI, which makes scanners used mainly at airports and maritime ports to screen for weapons and other contraband, one of the top gainers on the LABJ Stock Index last week. Shares rose 12 percent to close at $59 on Feb. 29, up 57 percent over the previous year. (See page 28.)

On Feb. 27, the company announced that a contract with the Mexican government would bring in approximately $900 million over six years. The deal was first announced in mid-January, but the value was then estimated at $400 million. OSI didn’t cite a reason for the increased value in its announcement and executives weren’t available for comment.

Jeff Martin, an analyst and co-director of research at Roth Capital Partners in Newport Beach who follows OSI, said that the half-billion-dollar jump in revenue wasn’t the sole driver of the stock spike. The contract is also noteworthy because it exemplifies a shift in OSI’s business model, which was reported by the Business Journal in November.

Historically, the company has made money by selling equipment. But in the Mexican contract, as well as a smaller $15 million contract announced Feb. 15 with the Port of New York and New Jersey, the company will sell the scanners and then manage the scanning system, providing staff training, data management and maintenance.

The new business model provides ongoing revenue that makes investors feel more secure, Martin said.

“The Mexican contract is what’s responsible for the stock’s recent run,” he said. “Profit margins on this contract are higher than the current companywide margins. So you have revenue growing and margins expanding, and that’s typically a scenario for a successful stock.”

Roth has a price target of $75 for OSI, 27 percent above its price last week.

Also, the Homeland Security Department issued a study last week that found X-ray scanners such as those made by OSI were not a health risk. In November, the European Union banned X-ray scanners at airports because of questions about cancer-causing radiation.

The new study found the scanner’s radiation levels were so low that a traveler would have to be screened 17,000 times in a year to reach the threshold for cancer risk.

Martin noted that most of the company’s growth now comes from scanning cargo at ports. Eventually, he believes that OSI technology will be used at sports and concert venues, shopping malls and other public buildings.

“The entire security segment has a lot of opportunity,” he said. “OSI is just getting into cargo, and to have two contracts announced in a 12-day time frame really inspires investor optimism. The momentum of the business right now is impressive.”