Street defends OSI Systems on potential government debarment

Shares of OSI Systems (OSIS +3%) fell as much as 39.8% yesterday before clawing back gains on news that the TSA wants to debar the company's Rapiscan subsidiary from future government contracts after it substituted a Chinese part into scanners that were part of a subsequently cancelled $60M contract. Benchmark and CRT Capital defended the stock yesterday, calling the move overblown.

Roth Capital and Stephens are out defending the company in the morning. Roth thinks a worst-case scenario is priced in, views the congressmen's recommendation to debar as extreme, and thinks shares could rally to $66-$84 on a positive resolution.

Stephens reiterated an Overweight rating but reduced its PT to $60 from $86. Analyst Tim Quillin writes, "While OSIS' missteps in its Security business are deeply troubling and suggest systemic management issues, we believe the stock's 33% nosedive over the past 2 trading days largely reflects those issues. With the stock trading at ~6x FY14E EBITDA, we believe investors should consider the stock here, but caution that negative headline risk remains high."

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