OSI Systems: A High-Backlog, Cash-Flow-Driven Security Sector Leader Poised for FY2026 Growth

OSI Systems, Inc. (NASDAQ: OSIS) has long been a cornerstone of the security and defense technology sector, but its recent performance and strategic positioning suggest it is entering a new phase of sustained growth. With a record backlog exceeding $1.8 billion, robust cash flow generation, and a diversified portfolio of high-margin products and services, the company is uniquely positioned to capitalize on global demand for security solutions in FY2026. For investors seeking exposure to a cash-flow-driven industrial leader with strong visibility into future revenue, OSI Systems offers a compelling case.

A Backlog as a Growth Catalyst

The most striking metric in OSI's recent earnings reports is its $1.8 billion backlog, a figure that underscores the company's ability to convert orders into future revenue. This backlog is not just a number—it represents a multi-year pipeline of contracts across its three core divisions: Security, Optoelectronics & Manufacturing, and Healthcare. The Security division, in particular, has been a powerhouse, driven by demand for airport and cargo screening systems, border security solutions, and defense applications. For context, the division's 10% year-over-year revenue growth in Q3 FY2025 (to $315 million) was achieved despite the winding down of certain Mexico-based contracts, which are transitioning into recurring service revenue streams.

The company's book-to-bill ratio exceeding 1.0 in Q3 further reinforces its momentum. This metric indicates that orders received outpaced revenue recognized, ensuring a steady flow of work into FY2026. With a backlog this large, even modest conversion rates translate into significant top-line growth. For example, if OSI converts just 60% of its $1.8 billion backlog into revenue in FY2026, that would add $1.08 billion to its income statement—well above its FY2025 revenue of $1.713 billion.

Cash Flow as a Strategic Advantage

OSI Systems' financial strength is not limited to its backlog. The company's operating cash flow has surged from a $52.1 million outflow in Q3 FY2024 to a record $81.6 million inflow in Q3 FY2025. This transformation is driven by improved working capital management, including a 10% reduction in Days Sales Outstanding (DSO) and tighter inventory controls. The CFO has signaled further opportunities to optimize cash flow, particularly in reducing DSO further, which could unlock additional liquidity for strategic investments or shareholder returns.

This cash flow generation is critical for a company with OSI's growth ambitions. The recent expansion of its credit facility to $825 million (with a maturity extended to 2030) provides flexibility to fund R&D, acquisitions, and operational scaling. For instance, the acquisition of the RF Solutions business in 2024 has already contributed to the backlog and is expected to drive incremental revenue in FY2026.

Strategic Momentum Across Divisions

While the Security division is the backbone of OSI's growth, the Optoelectronics & Manufacturing and Healthcare segments are emerging as key drivers. The Optoelectronics division, which supplies flexible circuit products and industrial automation solutions, grew 15% year-over-year in Q3 FY2025. Its global manufacturing footprint allows it to pivot quickly in response to trade policy shifts, such as U.S. tariffs, giving it a competitive edge in supply chain diversification.

The Healthcare division, under new leadership, is also showing promise. Recent contracts for patient monitoring solutions and diagnostic tools highlight its potential to become a mid-single-digit growth engine. Management has emphasized a long-term R&D focus on next-generation platforms, which could position the division to capture market share in the rapidly evolving healthcare tech sector.

Navigating Risks and Tariff Uncertainty

Despite its strengths, OSI Systems is not without risks. The winding down of Mexico-based contracts and potential headwinds from U.S. tariffs could pressure short-term revenue. However, management has demonstrated agility in mitigating these risks. For example, the company's vertically integrated manufacturing model allows it to adjust pricing and production strategies to maintain margins. Additionally, the shift toward service revenue (which now accounts for a growing portion of total revenue) provides a more stable income stream compared to project-based sales.

Investment Thesis and Valuation

For investors, the case for OSI Systems hinges on its ability to convert its $1.8 billion backlog into revenue while maintaining strong cash flow margins. At current valuations, the stock trades at a price-to-cash-flow multiple of ~10x, significantly below its 5-year average of 12x. This discount reflects market skepticism about the company's ability to sustain growth, but the FY2025 results and updated guidance suggest otherwise.

The company's updated FY2025 guidance—revenue of $1.69–$1.715 billion and non-GAAP EPS of $9.15–$9.45—implies a 10–12% earnings growth rate. If FY2026 delivers similar performance, the stock could see a re-rating to align with its cash flow generation and backlog visibility.

Conclusion: A Buy for Long-Term Growth

OSI Systems is a rare combination of a high-backlog industrial company and a cash-flow-driven growth story. Its strategic momentum, diversified business model, and management's focus on operational efficiency make it a compelling investment for those seeking exposure to the security and defense sector. While FY2026 guidance remains unannounced, the company's current trajectory—bolstered by a $1.8 billion backlog and $82 million in operating cash flow—provides a strong foundation for sustained growth. Investors who act now may find themselves positioned to benefit from a stock that is undervalued relative to its long-term potential.