OSI Systems Inc (OSIS): A High-Conviction Play in Defense and Industrial Innovation with Durable Cash Flow Potential

OSI Systems Inc (NASDAQ: OSIS) has emerged as a standout performer in the defense and industrial sectors, delivering record-breaking Q4 2025 results that underscore its sustainable growth momentum and margin expansion. With a 5% year-over-year revenue increase to $505 million in Q4 and a full-year fiscal 2025 revenue of $1.713 billion (up 11% YoY), the company has solidified its position as a leader in high-margin markets. For investors seeking a “growth-at-a-reasonable-price” opportunity, OSI Systems' strategic execution, divisional outperformance, and long-term contract visibility make it a compelling case study in industrial innovation.

Divisional Outperformance: Security as the Engine of Growth

The Security division, which accounts for 70% of OSI Systems' revenue, was the primary growth driver in Q4 2025. GAAP revenue for the division reached $1.196 billion in fiscal 2025, a 14.7% increase YoY. This growth was fueled by robust service revenue from an expanding installed base of security inspection systems, including X-ray checkpoint scanners and cargo screening solutions. The division's non-GAAP operating margin exceeded 20%, reflecting operational efficiency and pricing power in a sector with limited competition.

The Optoelectronics and Manufacturing division also contributed meaningfully, with 15% YoY revenue growth in the first nine months of fiscal 2025. This segment benefits from OSI Systems' vertically integrated structure, which reduces supply chain risks and enhances profit margins. The division's focus on high-performance components for industrial and medical applications positions it to capitalize on long-term trends in automation and precision manufacturing.

Margin Expansion and Cash Flow Resilience

OSI Systems' Q4 2025 results highlight its ability to expand margins while maintaining strong cash flow generation. The company reported a record non-GAAP EPS of $3.24, a 14% YoY increase, and GAAP EPS of $3.03, up 19% YoY. These figures outperformed analyst estimates and reflect disciplined cost management and operational leverage.

The non-GAAP operating margin for Q4 2025 reached 15.7%, up 0.9 percentage points from 14.8% in Q4 2024. This margin expansion is critical for investors, as it demonstrates the company's ability to convert top-line growth into bottom-line profitability. Additionally, OSI Systems generated $81.6 million in operating cash flow for Q3 FY25 and $79.5 million in non-GAAP operating income for Q4, underscoring its financial resilience.

Long-Term Contract Visibility and Strategic Guidance

With a record backlog of over $1.8 billion as of June 30, 2025, OSI Systems has significant visibility into future revenue streams. The company's book-to-bill ratio of 1.0 in Q4 indicates a balanced order flow, while its updated fiscal 2026 guidance of $1.805–$1.850 billion in revenue and $10.11–$10.39 in non-GAAP EPS reflects confidence in sustained demand.

The Security division's backlog, in particular, is a key tailwind. With contracts spanning aviation, ports, and border security, OSI Systems is well-positioned to benefit from global trends in infrastructure modernization and geopolitical uncertainty. The Optoelectronics and Manufacturing division's backlog also provides a buffer against short-term volatility, ensuring steady cash flow.

Healthcare Challenges and Strategic Rebalancing

While the Healthcare division faced headwinds in Q4 2025, including delayed collections from large contracts in Mexico, the company has taken proactive steps to stabilize this segment. The introduction of new leadership in the division signals a strategic rebalancing, with a focus on streamlining operations and targeting high-margin opportunities. These adjustments, though temporary, highlight OSI Systems' agility in addressing sector-specific challenges without compromising its core strengths.

Investment Thesis: Growth-at-a-Reasonable-Price

OSI Systems' combination of durable cash flow, margin expansion, and long-term contract visibility aligns with the “growth-at-a-reasonable-price” (GARP) investment strategy. At a trailing P/E ratio of approximately 18x (based on FY2025 GAAP EPS of $8.71), the stock is trading at a discount to its historical average of 22x, offering a margin of safety for investors. The company's expanded $825 million credit facility further enhances its capacity to fund strategic initiatives, including R&D in next-generation security technologies.

Historical data from 2022 to the present reinforces the stock's responsiveness to earnings performance. When OSIS beats expectations, the stock has historically delivered a 3-day win rate of 27.27%, a 10-day win rate of 54.55%, and a 30-day win rate of 54.55%. The maximum return during this period was 7.22% over 59 days, underscoring the short-term appreciation potential following positive earnings surprises. These patterns suggest that OSIS's disciplined execution and margin resilience translate into tangible shareholder value over time.

For investors seeking exposure to industrial innovation with a focus on defense and industrial markets, OSI Systems presents a high-conviction opportunity. Its vertically integrated model, strong backlog, and margin resilience provide a durable foundation for long-term value creation.

Conclusion

OSI Systems Inc has demonstrated exceptional execution in Q4 2025, leveraging its leadership in high-margin markets to deliver record earnings and margin expansion. With a robust backlog, updated guidance for fiscal 2026, and a strategic focus on operational efficiency, the company is well-positioned to sustain its growth trajectory. For investors prioritizing industrial innovation with durable cash flow potential, OSI Systems offers a compelling case for inclusion in a diversified portfolio.