As Promised, Opinion- But Not by Us.

A few weeks ago, we reminded you that we do not tout or make price predictions on publicly traded companies. As a 20 year old Investor Relations firm we find it more prudent and ethical to bring you news and factual information about our subject companies, allowing YOU to decide if a particular equity fits your investment strategy.

However, there are those newsletters that do prognosticate and a very few have been quite successful in doing so. Over the last year, we've monitored literally dozens of these publications and found one, Bizfn's Growth Report, which we feel is the most salient and unbiased. Growth Report's insight and analysis resulted in an average return of 40% for the 22 companies it featured in 2002.  Better yet, its top selections enjoyed a 444% appreciation.

We approached the editors of Growth Report and asked if they would like to write a guest column for the 1.2 Million StockUpTicks investors and they happily obliged. Today, we bring you, our readers, this expert commentary on a company that Growth Report is closely following.  This is data and analysis that would normally be available only to their paying subscribers but we're giving it to you today to introduce you to this intriguing stock picking service.

A StockUpTicks Exclusive: Growth Report

This week Growth Report re-visits homeland defense as an investment theme that will continue to have legs as long as the state of perceived and real threats remains high.  We have been looking for homeland defense companies with leading technologies, sales and earnings to backup their growing businesses.

Our search has led us to a California-based provider of security and inspection systems.  The company is OSI Systems.  While OSI Systems is not a pure-play homeland defense company, the firm is a leading provider of security solutions ranging from cargo screening to metal detectors and worthy of investor attention.

The Latest Addition to Growth Report's Technology Portfolio

Ancore was most recently acquired by OSI systems. The companies announced in November 2002 that Ancore would be bought by OSI for $7.75 million in cash and OSI stock, with additional performance-based incentives included as part of the deal. 

Ancore is a leading developer of material specific inspection technologies for aviation security, cargo inspection, and counter terrorism.  The company has patented Therman Neuron Analysis and Pulsed Fast Neutron Analysis with investments greater than $100 million from government and private funding. 

The acquisition of Ancore provides OSI with another leading-edge technology, while Ancore receives the benefit of OSI’s marketing, sales and manufacturing facilities that will allow for faster and more efficient commercialization of Ancore’s products. 

At the end of November, Anrore received an order of $3.2 million for a Pulsed Fast Neutron Analysis (PFNA) cargo inspection system.  The U.S. government plans to use the system at the U.S. / Mexico boarder in El Paso, Texas for operational evaluation.  This evaluation will be conducted by the Department of Defense, U.S. Customs Service, and Transportation Security Administration.  In late December OSI received a follow on order in the amount of $3.7 million.  The company anticipates the total project to be $8.5 million, and expects the systems to be operation by the end of 2003.

OSI Chairman and CEO Deepak Chopra commented on the follow-on order, “We are pleased to announce this follow-on order, which is based upon the successful execution of milestones by Ancore during the initial phase of this project. The El Paso site will demonstrate the capabilities of this technology to the U.S. Government and potential customers worldwide.”

This initial order from the U.S. government is a great first step for OSI and Ancore.  The commitment of $6.9 million in government funds is an initial indication of the government’s confidence in Ancore’s ability to develop a cargo screening system to be functional at the U.S.-Mexico boarder.

OSI Systems represents a growth stock with a concentration on security technologies with the diversification of well-established businesses in a variety of sectors.  The company is cash-rich, and at the end of the first quarter 2003, had cash and cash equivalents of $67.2 million, or $5 per share.  In other words, the enterprise value of OSI is $171.6 million or $12 per share. 

The company has posted solid revenue and earnings growth over the past year, and the recent acquisition of Ancore in likely to boost both in the short and long term.  In 2001, OSI earned $0.38 per share on revenue of $111.1 million, compared with $0.60 in earning per share on revenue of $124.2 million in 2002 (year ended June 2002).  The 2002 year-end numbers represented revenue and earnings growth of 11.8% and 57% respectively. 

The consensus estimates for this year (ending June 2003) among four analysts indicate revenue of $151 million and earnings per share of $0.93.  Consensus estimates would indicate revenue and earnings growth of 21% and 55% respectively. 

For the first quarter 2003 (ended Sept. 2002) OSI Systems reported revenue of $37.1 million compared to $26.5 million for the year-ago-period.  Net income was $3.2 million or $0.24 per share.  During the quarter OSI completed a private placement of 1,250,000 shares at $17.35 to three institutional investors.  Net proceeds were in the amount of $20.6 million.  As part of the transaction, the company issued 281,250 warrants at $21.217 per share. 

In the first quarter news release, OSI’s management confirmed previous 2003 earnings per share guidance to the high end of the previously announced $0.90 - $0.92 per share range after taking into account the additional shares from the October financing.  It is worth noting that in each of the last four quarters, management has been successful in beating consensus earnings per share estimates. 

The company has successfully driven growth through its parcel screening solutions.  Future growth is likely to come from the large parcel and cargo market.  This is one of the reasons the acquisition of Ancore is important to the long-term prospects of OSI Systems.  In a December 13 research note, Morgan Keegan analysts Brian Ruttenbur and Yuliya Mock reported that, “Currently, 75% of air cargo is being transported on passenger aircrafts, and there is no mandate to check this cargo, yet.  Over time, we believe along with tightening security at ports and boarders, air cargo will be a priority as well.”

Ancore received its first U.S. cargo system contract in the second quarter 2003.  The Ancore acquisition will contribute greatly to OSI’s cargo screening revenue, which is expected to grow from $5 million in 2002 to $25 million in 2003. 
 
 

Growth Report Issues Buy Rating and 12 Month Target

Growth Report is initiating coverage of OSI Systems with a Buy Rating and a 12-month target of $23.  This share price target is based on OSI trading at a multiple of 25 times 2003 earnings per share of $0.92.   A price to sales multiple of 2 would result in a market capitalization of $300 million, or roughly $23 per share.  This initial share price target represents a 30% premium to a recent price of around $18 and is what we see as a worthwhile gamble in a world seeking to control risk.
 

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However, if you find Growth Report to be a worthwhile tool, continue your subscription for a very reasonable rate.  PLUS – as an added bonus, you will receive a free 28-page Special Report titled “Six Sizzling Small Caps For This Market” (a $99 value) absolutely FREE!  Waste no time – start your trial subscription today to learn about other stocks with huge potential – just like OSI Systems! 

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