Muddy Waters Capital is short OSI Systems Inc. (OSIS) on concerns the company’s international contracts raise red flags that could cause an earnings cliff and significant regulatory fines. Should such a company be responsible for handling the nation’s security? argues the short biased research firm.
See the video on their short embedded below.
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We are short OSI Systems, Inc. (OSIS.US) because we think it is rotten to the core. We believe it obtained a major turnkey contract in Albania through corruption. It is likely that OSIS’s accounts are misstated as a result. We believe the pricing of its Mexico turnkey contract does not stand up to scrutiny. We estimate that the contract is so rich, it accounted for more than 50% of OSIS’s FY2017 EBITDA, despite being only 15% of revenue. Put another way, we estimate the Mexico contract’s EBITDA margin is approximately 55%, which would mean the rest of OSIS has an EBITDA margin of a paltry 7.5%. This contract is up for renewal in 2018, and non-renewal would seemingly have an enormous impact on OSIS’s profits. It also implies that there is significant room for price adjustment downward, which could have a material impact on profits. Former employees’ statements support our view that OSIS is rotting from the inside.
Conclusion
It is ironic that a company integral to enforcing the most ticky-tack of rules at security checkpoints seems to pay so little heed to the rules (ahem…laws) governing its conduct of business. We believe the Albania contract resulted from a massive bribe of half the concession value. We believe OSIS’s accounts are misstated as a result of this apparent bribe. Mexico looks to be egregiously priced, which certainly raises questions. Former employees painted a reasonably consistent picture of a company operating with disregard for the law. We are therefore short because this way of doing business just doesn’t seem sustainable.
Report below
