Ken Kirkpatrick of OSI Geospatial. (Photo by Darren Brown, OBJ)

While OSI Geospatial's stock has declined steadily since the end of last year, the Ottawa-based navigational systems company has enjoyed a revival of late following the announcement of several recent deals with the U.S. military.

Word of a five-year, US$10-million contract to provide land-based command-and-control systems and engineering services to the U.S. Army – the company's largest deal in the U.S. market – helped drive the company's share price back up to its six-month high of 53 cents, after dropping to its lowest level in years, 35 cents per share, at the end of April.

The new contract is good news for a company whose business model depends on unpredictable, small deals subject to lengthy procurement processes, and as defence departments worldwide upgrade their technology, OSI seems poised to strike.

The company's view: "This larger contract supports moving technology from leading-edge research and development into production, with the technology going out to the operational user," said OSI chief executive Ken Kirkpatrick. "This ($10-million deal) is an amazing reference for us, as we started to develop other opportunities outside the U.S."

The contract puts OSI in position to capitalize on soldier modernization programs taking place worldwide, such as the United Kingdom's Future Infantry Soldier Technology (FIST) program, Mr. Kirkpatrick said. But he noted the company still faces substantial challenges, mostly involving the timing of new contracts.

"We're a very small company in a difficult market space; the defence and security market is not an easy place to do business," he said.

"Any negative twist in the market can delay (contracts) that should have happened," continued Mr. Kirkpatrick. "Last year's (earnings) were directly impacted by the difficulty of being able to predict the timing of awards turning into revenues – from the market perspective, (investors) want to see us close off on some of these large deals."

In 2007, the company reported a loss of $2.9 million, or nine cents per share, compared to a profit of $932,000 or nil per share a year earlier, though full-year revenues grew by five per cent to $25.3 million. OSI blamed their red ink on difficulties in closing key contracts in the U.K. and U.S., adding its costs had grown partly because of a move to Ottawa from British Columbia.

Those numbers didn't help the company's share price, Mr. Kirkpatrick admitted, but since the $10-million deal was announced, OSI's stock has risen by around 20 per cent and "seems to be holding in that range."

"Moving into this year we've seen solid progress in the performance for Q1, which is typically the slowest quarter since the governments shut down for Christmas, but we've been putting out a fairly steady stream of contracts and we expect that to continue," he said.

The company doesn't expect to see too many other large contracts in the near future, but Mr. Kirkpatrick said OSI's stock price should perform solidly with a steady stream of smaller deals to support its core business.

"(The small deals are) a good indication that the company has built a solid customer base with steady revenues, and we're in a good position for the larger program we're pursuing, which is a key driver to future growth," he noted. "As we continue to bring positive news that we're expanding customer relationships, adding new customers and new contracts, we will convince the markets that we have potential for substantial growth."

The analyst says: "There's a lot of work being done in soldier modernization globally, which is likely to lead to more opportunities (for OSI)," said Clarus Securities analyst Robert Catellier. "(The modernization programs are) addressing the fact that warfare has gone from bigger units to smaller, more deployable units, and it's causing investment to go heavily into supporting ground troops."

Mr. Catellier, who doesn't own any OSI shares, rates the company as a 'speculative buy,' with a 12-month target price of 90 cents per share.

He wrote in a research note that the "long-term component of the (U.S. Army) contract illustrates increased commitment to OSI," besides being a good testimonial to attract business in Canada and United Kingdom, he wrote, "There are also diversification benefits, reducing reliance on marine-based applications, which can have lumpy sales patterns."

Mr. Catellier added OSI could see material improvements in profitability if the company manages to take advantage of global growth opportunities, and keeps expense growth low.

Recent events: May 7 – Signs US$10-million contract with U.S. army; April 29 – Wins US$1.6-million deal with U.S. army; April 14 – Signs U.S. $925,000 contract to provide simulation-based training technology to U.S. navy; March 3 – Ontario Securities Commission issues cease-trade order to investigate allegations that insiders had access to undisclosed information. The news follows a Feb. 26 announcement delay of Q4 and fiscal 2007 results due to U.S. Securities and Exchange Commission concerns; Feb. 7 – Signs a Canadian Navy port security unit for its new asset control and tracking terrestrial system.

Catalysts to watch: Steady flow of small contracts from military units around the world; success in diversifying into land and air navigation, critical infrastructure protection, and security assessment markets; changes to government procurement cycles and their effect on backlog; U.S. election outcome and decision on Middle East wars; expansion of FIST programs.