Why OSI Systems’ Shares Cratered

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of OSI Systems (NASDAQ: OSIS  ) are down about 14% today after its earnings report offered underwhelming forward guidance. The company, known for its airport screening systems, narrowly bested analysts' bottom-line estimates, but the rest of its report was thoroughly underwhelming.

So what: OSI reported revenue of $194 million and net income of $12.4 million for its fiscal second quarter, both of which represented minor upticks from the year-ago quarter. Adjusted earnings per share of $0.70 came in two cents ahead of the consensus, but analysts were looking for $211 million in revenues, so this was a pretty rough miss on the top line.

OSI's forward guidance range is fairly broad for full-year EPS, coming in at $2.77-$3.00 per share against a consensus estimate of $2.86. The top line was again problematic here, as the full-year $850 million-$875 million range came in below the $876.5 million consensus.

Now what: OSI CEO Deepak Chopra (no relation to the famous doctor of the same name) pointed to Mexican screening initiatives and growth in the optoelectronics and manufacturing division as sources of strength. The company's backlog is also up significantly, to $1 billion from $400 million a year ago. On the other hand, the TSA recently pulled out of its arrangement with OSI subsidiary Rapiscan for backscatter scanner installations, the so-called "naked body scanners" that have become quite controversial. This is OSI's second major drop in recent months, but the company's P/E remains a bit high at 26.7. It's a lot cheaper than it once was, but OSI isn't a screaming buy. I'd keep my eye on it for any further drops, which might push it into buy territory.

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