The stock of OSI Systems Inc (OSIS, Financial) has recently seen a daily gain of 14.22% and a three-month gain of 17.01%. Its Earnings Per Share (EPS) (EPS) stands at 4.82. However, the key question we aim to answer here is: Is the stock significantly overvalued? To do this, we will delve into an in-depth valuation analysis of OSI Systems. We invite you to join us in this exploration.
Company Overview
OSI Systems Inc is a leading designer and manufacturer of electronic systems and components for businesses in the homeland security, healthcare, defense, and aerospace markets. The firm operates in three business segments: Security, which provides security and inspection systems; Healthcare, which offers patient monitoring, diagnostic, cardiology, ventilation systems, and defibrillators; and Optoelectronics and Manufacturing, which provides specialized electronic components and manufacturing services for the Security and Healthcare segments and external original equipment manufacturers. The majority of the firm's revenue is generated in North America, with the rest coming from Europe, the Middle East, Africa, and the Asia Pacific regions.
Understanding the GF Value
The GF Value is a proprietary measure that indicates the current intrinsic value of a stock. It is calculated based on three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance. The GF Value Line denotes the fair value at which the stock should ideally be traded. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Based on the GuruFocus Value calculation, OSI Systems (OSIS, Financial) stock appears to be significantly overvalued. At its current price of $137.26 per share, OSI Systems has a market cap of $2.30 billion, indicating a significant overvaluation.
Because OSI Systems is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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Financial Strength
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid this, an investor must review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are great ways to understand its financial strength. OSI Systems has a cash-to-debt ratio of 0.18, which ranks worse than 89.48% of 2243 companies in the Hardware industry. The overall financial strength of OSI Systems is 6 out of 10, which indicates that the financial strength of OSI Systems is fair.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. OSI Systems has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $1.20 billion and Earnings Per Share (EPS) of $4.82. Its operating margin is 10.48%, which ranks better than 76.81% of 2423 companies in the Hardware industry. Overall, the profitability of OSI Systems is ranked 8 out of 10, indicating strong profitability.
Growth is probably the most important factor in the valuation of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of OSI Systems is 1.6%, which ranks worse than 58.37% of 2323 companies in the Hardware industry. The 3-year average EBITDA growth rate is 6.3%, which ranks worse than 58.83% of 1948 companies in the Hardware industry.
ROIC vs WACC
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, OSI Systems's return on invested capital is 9.33, and its cost of capital is 9.8.
Conclusion
Overall, OSI Systems (OSIS, Financial) stock gives every indication of being significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks worse than 58.83% of 1948 companies in the Hardware industry. To learn more about OSI Systems stock, you can check out its 30-Year Financials here.
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