Image of Scanner Maker Improves With Investors

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Shares of OSI Systems Inc., buffeted late last year by the company’s loss of a $60 million contract with the Transportation Security Administration, have rebounded of late as investors grow assured the company will be allowed to bid on future government contracts.

The company’s stock has risen more than 15 percent year to date and closed at $61.40 to finish up 4 percent for the week ended Feb. 19. (See page 59.)

The company had been trading as high as $76 a share in November. When news broke in early December that the TSA was canceling a contract for one of its signature scanning devices after it was determined that an unauthorized Chinese part had been included in its manufacture, OSI’s shares fell as far as $40.

Analysts said the plunge was an overreaction, and as investors assessed the situation and concluded that debarment was unlikely, OSI’s price was likely to hit precancellation levels.

“I think many have come to the conclusion that the risk is not terribly high,” said Yair Reiner, managing director and senior analyst for aerospace and defense electronics at Oppenheimer & Co. Inc. in New York. “If it were a consensus view among investors that the risk is very low, the stock would be up to the levels where it was prior to its fall.”

He said the price still reflects some worries among investors, which he believed will be cleared in a couple of months.

Oppenheimer issued a note Feb. 19 citing “a U.S. government source” saying that Hawthorne-based OSI’s failure to get TSA approval to use the part was only a procedural lapse.

“They incorrectly determined that the part didn’t require approval,” said Reiner, “That was an error.”

In fact, government contracts don’t account for a significant part of OSI’s business. In addition to security products, the company makes health care and optoelectronics products.

According to Timothy J. Quillin, analyst at Stephens Inc. in Little Rock, Ark., OSI’s contract with TSA accounts for less than 5 percent of its revenue and its total government contracts amount to about 8 percent.

“The fundamental outlook is bright,” he said. “It appears that they are poised for continued profitable growth.”

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