Foolish Forecast: OSI Looks Lucky

OSI Systems (Nasdaq: OSIS) sure covers a lot of high-profile ground for a small cap: medical imaging, homeland security, and optoelectronic devices. The company reports fourth-quarter earnings tomorrow morning, so let's see how all that high-flying gadgetry adds up.

What analysts say:

• Buy, sell, or waffle? Five out of six Wall Street analysts want to buy this stock, and the sixth prefers a hold rating. In our Motley Fool CAPS database, it's a five-star market general, with a 98% approval rating among 93 of your fellow Fools.
• Revenue. The analysts expect $153.3 million, on average. That's 22% more than last year's $125.6 million. OSI has already reported $152.7 million in preliminary revenue, though.
• Earnings. The average projection points to about $0.20 per share in pro forma profits, up from $0.04 per share last year.

What management says:
In the third-quarter earnings release, CEO Deepak Chopra said that the order backlog is stronger than ever, thanks to new business in the security segment, and that the ongoing cost-cutting projects should be completed by the end of the fiscal year. That would be right now.

Also, there's a fresh influx of loans to fuel operations. That will be important in order to fund the year-to-date operating shortfall of $8.2 million.

What management does:
It's a rocky road, as you'd expect from a small cap with a lumpy revenue flow and unpredictable bottom-line results. Also, keep in mind that these are GAAP margins, not the adjusted pro forma numbers the analysts like to predict. But sales are growing at a remarkably steady clip, and the company has increased its R&D spending -- and thus its reinvestment in the future -- in each of the last six quarters. That, to me, is a more optimistic trend than any whiz-bang accounting tricks could ever conjure up, especially for a small and growing business.

Margin	12/2005	3/2006	6/2006	9/2006	12/2006	3/2007
Gross	37.1%	38.3%	39.1%	38.3%	37.6%	36.4%
Operating	(1.1%)	0.3%	2.8%	2.4%	1.4%	0.7%
Net	(2.5%)	(1.5%)	(0.5%)	(0.9%)	(5.1%)	(4.4%)

Growth (YOY)	12/2005	3/2006	6/2006	9/2006	12/2006	3/2007
Revenue	19.1%	12.5%	17.6%	16.8%	17.6%	18.1%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Being Swedish, I can't help but chuckle at the ticker symbol a bit. "Osis" means "tough luck" in my native tongue, though it doesn't sound like an apt description of the situation for OSI shareholders today.

The stock is up some 28% over the past 12 months, easily outpacing the S&P 500. On the other hand, L-3 Communications (NYSE: LLL) is running neck-and-neck with its smaller rival, and Rule Breakers pick American Science & Engineering (Nasdaq: ASEI) has coughed up a 51% gain over the same period.

I realize that none of these companies are direct competitors to OSI, simply because of the diversity of its operations. It's a microconglomerate, kind of like Otter Tail (Nasdaq: OTTR), but based around advanced electronic systems rather than power generation. It's striving to be more like a mini-Philips (NYSE: PHG) or a micro-Lockheed (NYSE: LMT), compared to Otter Tail's General Electric (NYSE: GE) aspirations.

But while that makes it tough to draw direct comparisons to peers and rivals, it's also a double shot of instant respect. For one, getting exposure to multiple high-growth markets in one stock is instant diversification, and if one gambit makes it, the other two may end up irrelevant. For another, every stock mentioned in this roundup carries a four-star CAPS rating or higher, placing OSI in well-regarded company.

Now, neither medical systems, contraband scanners, nor advanced optoelectronics look ready to blow up overnight. The company is still unprofitable, and operating cash flow is negative. But for a long-term investor willing to take a few chances for a potentially large payoff in a couple of years, this could be a tempting pick. Tomorrow's results will largely be signal noise; Fools should look for news on what really matters to OSI, including order development, growing its customer base, and launching compelling products.

American Science & Engineering is a Motley Fool Rule Breakers recommendation, and Otter Tail is a Motley Fool Hidden Gems pick. You can try out either newsletter service absolutely free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is the prognosticator of prognosticators.