As airports around the world upgrade their security systems, this week’s Stock of the Week stands to profit.

Staying Secure

OSI Systems Inc. (OSIS) plays a major role in security screening for travelers worldwide and is about to benefit from significant upgrades to equipment used for that purpose.

The stock has been held back by issues in the company’s small health-care division, which provides equipment and supplies for patient monitoring, diagnostic cardiology and anesthesia delivery. Management issues in that division led to losses after multiple years of 10% profit margins. The division now has new management and is back on track—and represents only 20% of OSI’s revenue, which was $961 million last year and is likely to be $1.07 billion this year and $1.17 billion in 2019.

OSI’s security segment is where investors should focus. The European Union is taking security and screening to a new level with a timetable of 2020 for replacing or upgrading older machinery—a big opportunity for Hawthorne, California–based OSI. By the time the EU upgrade is done, the US will likely be starting its own upgrade. These factors outweigh short-term issues such as the recent renewal of a drug-screening program in Mexico at a lower profit level and a probe of possible government bribes involving a small project in Albania—in which OSI is cooperating with the investigation and is unlikely to pay a material fine.

Fiscal year: June. Earnings per share: 2019 est./$4.11…2018 est./$3.58…2017/$2.99.

William E. Costello, CFA, is senior vice president and senior portfolio manager, Westwood Holdings Group, Dallas, which manages $24.2 billion, including the $295 million Westwood SmallCap Fund (WHGSX). WestwoodGroup.com