OSI Systems: A High-Conviction Buy as Recurring Revenue and Security Demand Drive Margin Expansion and Valuation Upside

In an era of macroeconomic uncertainty, investors are increasingly turning to defensive and industrial sectors for stability. Among these, OSI Systems (OSIS) stands out as a compelling opportunity, driven by accelerating service revenue growth, margin expansion, and a robust backlog that positions it to capitalize on secular tailwinds in security and industrial demand. With FY2026 guidance now in place and a recurring revenue model that insulates it from cyclical volatility, OSI Systems is poised to justify a higher valuation multiple—and deliver outsized returns for long-term investors.

Recurring Revenue: A Foundation for Predictable Growth

OSI Systems' service revenue has surged at a 32.3% year-over-year rate in Q3 FY2025, with total service revenue for the first nine months of FY2025 reaching $277.5 million—a 15.3% annualized increase. This growth is underpinned by the company's vertically integrated global manufacturing footprint and its focus on long-life inspection systems, which generate recurring service income over 7–10-year lifecycles. The Security division, a cornerstone of this strategy, has delivered 16% year-over-year revenue growth in Q2 FY2025, even against a tough prior-year comparison.

The company's ability to monetize its installed base is a critical differentiator. With over $1.8 billion in backlog and a book-to-bill ratio above 1.0 in Q3 FY2025, OSI Systems is converting long-term contracts into a predictable revenue stream. For example, a $76 million airport security contract—the largest in the company's history—highlights the scalability of its recurring model. As Ajay Mehra, CEO, noted, “Our inspection systems create a durable revenue engine, even in volatile markets.”

Margin Expansion: Strategic Efficiency and Operational Discipline

Operating margins have expanded despite strategic investments in growth. In Q4 FY2025, non-GAAP operating margins hit 15.7%, up from 14.8% in the prior year. The Security division, in particular, has been a margin powerhouse, achieving a 20.4% non-GAAP operating margin in Q4 FY2025. This strength is driven by cost discipline, scale in high-margin product lines, and a shift toward higher-value services.

The company's FY2026 guidance further underscores its margin resilience. With revenue projected to grow 5.4%–8.0% to $1.805 billion–$1.850 billion and non-GAAP EPS expected to rise 8.0%–11.0%, OSI Systems is demonstrating that it can balance growth with profitability. This is a stark contrast to many industrial peers, where margin compression often accompanies expansion.

Strategic Tailwinds: Security Demand and Industrial Resilience

The global security landscape is evolving rapidly, with governments and corporations prioritizing infrastructure protection, border security, and industrial safety. OSI Systems is uniquely positioned to benefit from this trend. Its Security division's 19.2% GAAP operating margin in Q4 FY2025 reflects strong demand for its X-ray and millimeter-wave inspection systems, which are critical in airports, ports, and defense facilities.

Meanwhile, the Optoelectronics and Manufacturing division has improved its operating margin to 14.0% in Q3 FY2025, driven by demand for precision components in aerospace and defense. The Healthcare division, though still maturing, is showing signs of stabilization and growth, with new product launches in patient monitoring poised to drive incremental revenue.

Valuation Upside: A Case for Higher Multiples

OSI Systems' financials justify a re-rating. With a trailing 12-month P/E ratio of ~18x (as of August 2025), the stock trades at a discount to its historical average of 22x and significantly below the S&P 500 Industrials sector's 25x. This undervaluation overlooks the company's recurring revenue model, which is more akin to a software business than traditional industrial manufacturing.

The FY2026 guidance, combined with a $1.8 billion backlog and $82 million in Q3 operating cash flow, provides a strong foundation for margin expansion and capital returns. With $825 million in expanded credit facilities and a debt-to-EBITDA ratio of ~1.5x, OSI Systems has ample capacity to fund strategic acquisitions or share buybacks, further enhancing shareholder value.

Investment Thesis: A High-Conviction Buy

OSI Systems is a rare combination of defensive resilience and growth potential. Its recurring revenue model, margin expansion, and strategic positioning in security and industrial markets make it an ideal candidate for a market rotation into these sectors. With FY2026 guidance already baked in and a forward P/E of ~16x, the stock offers a compelling risk-reward profile.

For investors seeking exposure to the industrial renaissance, OSI Systems is a high-conviction buy. The company's ability to convert backlog into cash flow, coupled with its long-term contract visibility, positions it to outperform in both bull and bear markets. As global demand for security infrastructure accelerates, OSI Systems is not just surviving—it's thriving.

Final Note: While the company faces risks such as supply chain disruptions and geopolitical volatility, its diversified customer base and recurring revenue model provide a buffer. For those with a 3–5 year horizon, OSI Systems represents a rare opportunity to invest in a high-margin industrial play with defensive characteristics.