Freedom maintains Buy rating on Optex Systems and cuts target price to $15.90

Freedom analysts maintained a “Buy” rating on shares of U.S. defense optics manufacturer Optex Systems (OPXS), lowering the target price to $15.90 from $16.20. With the stock at $11.28, the new target implies upside of about 41%. The valuation revision followed results for fiscal 2026 third quarter, which came in weaker than expected.

Revenue down 12%

Optex Systems’ third-quarter revenue fell 12.4% year over year to $9.7 million, coming in 21.1% below Freedom’s forecast. The main pressure was on the Richardson division, where revenue declined to $4.7 million.

Results were impacted by the deferral of deliveries of finished periscopes of roughly $1.5 million into the fourth quarter, as well as weaker demand for certain products. In addition, an order of about $2 million under a howitzer program was canceled after prolonged delays and the inability to agree on new terms.

The decline was partially offset by the Applied Optics Center division. Its revenue rose 18.3% year over year to $5.1 million, driven by higher sales of optical assemblies and specialty coatings.

Margin improvement was the quarter’s main positive

Despite lower revenue, Optex Systems managed to significantly improve profitability. Gross profit increased 5% year over year to $3.3 million, and gross margin expanded from 28.5% to 34.2%.

The improvement was driven by a more favorable sales mix, better pricing, and the completion of older low-margin contracts. In Freedom’s view, this trend confirms improving contract economics even amid weak revenue.

Net income, however, declined to $1.3 million, or $0.18 per diluted share, versus $1.5 million and $0.22 a year earlier. One reason was an increase in SG&A expenses from $1.3 million to $1.9 million. The company raised spending on the management transition, stock-based compensation, R&D, cybersecurity, and upgrades to internal systems.

Key risk tied to new orders

Optex Systems’ backlog at quarter-end totaled $30.1 million, while new orders for the first nine months of the fiscal year reached $19.5 million.

Management expects about $4 million in contracts under the Next Generation Squad Weapon Fire Control program. In addition, the company has more than $24 million in open proposals, from which it expects to secure roughly $10–12.5 million in orders over the next six months.

The financial position remains solid: cash increased to $6.2 million, and there is no debt on the credit line. Inventory rose to $16.4 million amid preparations for fourth-quarter deliveries.

Fourth quarter should make up the shortfall

After weak third-quarter results, Freedom slightly lowered its revenue forecast for Optex Systems and now expects fiscal 2026 revenue to come in closer to the lower end of management’s $43–45 million guidance range.

At the same time, analysts believe achieving the full-year outlook remains possible. About $15.5 million of deliveries from the current backlog are scheduled for the fourth quarter, including roughly $1.5 million of products that have already been manufactured but were deferred from the third quarter.

According to Freedom’s forecasts, OPXS revenue will be $42.8 million in fiscal 2026, $47.1 million in 2027, and $57.5 million in 2028. Adjusted EBITDA is expected at $6.7 million, $7.5 million, and $9.6 million, respectively.

Defense demand remains resilient

Analysts note that Optex Systems’ weak quarter does not yet point to a structural deterioration in the industry. General Dynamics’ Combat Systems division backlog grew by about 77% year over year to $29.4 billion, even though its quarterly revenue increased by only 0.3%. This indicates a significant amount of future workload that has not yet fully translated into current deliveries.

Government funding also provides additional support for the industry. In particular, the U.S. Army continues to fund production and modernization of key ground platforms and has outlined plans for the next Abrams tank contract with a potential value of about $3.8 billion.

In June, BAE Systems also received a $535 million contract for additional production of M109A7 Paladin self-propelled howitzers and M992A3 vehicles. Analysts note, however, that the direct impact of this contract on Optex Systems remains limited.

Why Freedom keeps its “Buy” rating

Optex Systems remains a niche supplier of defense optics for U.S. ground vehicles and those of its allies. Among long-term drivers, analysts highlight rising defense budgets, the company’s expansion beyond optics for armored vehicles into air, maritime, and space segments, as well as a share buyback program of up to $10 million.

Key risks include potential supply-chain disruptions, dependence on funding for defense programs, and business concentration in a limited number of platforms. In addition, strong industry demand may convert into orders and revenue unevenly.

Against this backdrop, Freedom lowered its target price for Optex Systems shares to $15.90 from $16.20 but maintained its “Buy” rating. Relative to the closing price of $11.28, the new target implies potential return of 40.96%.

Other investment ideas and events in the U.S. market

Previously, Freedom maintained a “Buy” rating on shares of WELL Health Technologies (WELL) with a target price of C$7.50 ($5.39). With the shares at C$4.19 at the time of publication, the upside was estimated at about 79%. In the second quarter, the healthcare company increased revenue by 12% year over year to a record C$400.4 million, while its Canadian business grew 32% to C$151.6 million. WELL also raised its adjusted operating profit outlook for 2026 to C$185–195 million. Analysts link the company’s further prospects to clinic network expansion, new acquisitions, and improving business efficiency. 

Another notable development was the potential IPO of Vantage Data Centers. One of the world’s largest data-center operators is considering going public at a valuation of about $100 billion and potentially raising around $10 billion. If completed on those terms, it could become the largest IPO in the data-center industry’s history. The company operates more than 2 GW of power capacity and about 20 million sq. ft. of space across 19 markets. Demand for its infrastructure is rising alongside the development of artificial intelligence, as training and running AI models require ever more computing power. 

Against this backdrop, Optex Systems (OPXS) represents a different investment story: the company operates in the defense sector, where long-term demand is supported by government programs and rising defense spending. Despite OPXS’s weak quarterly results, Freedom maintained a “Buy” rating and sees about 41% upside potential for the stock.

Not an individual investment recommendation.