Optex Systems Holdings Inc (OPXS) stock intrinsic value fair value estimate & owner earnings analysis

Optex Systems makes optical equipment for military vehicles and precision optics at two plants in Texas. The Richardson segment builds periscopes, vision blocks, sighting systems and related sights for U.S. and allied combat vehicles. The Applied Optics Center in Dallas makes laser-protective filters, day windows and coated optical assemblies for defense contractors and commercial riflescope makers. In fiscal 2025 (year ended September 28, 2025) about 70% of revenue came from five customers: U.S. government agencies (29%) and four U.S. defense contractors (19%, 10%, 6% and 6%). How we measured earnings. We look at the cash the business produces for its owners. That is operating cash flow with the timing swings in inventory, receivables and payables removed, less stock-based pay and the capital spending needed to keep the plants running. On that basis the business earned $5.8 million (about $0.84 a share) in fiscal 2025, $3.6 million in 2024, $2.3 million in 2023 and $1.7 million in 2022. It lost about $0.5 million in 2021, when revenue fell to $18.2 million. Three accounting calls matter. First, we treated the $1.05 million paid in 2024 for the Speedtracker product line as an acquisition rather than routine capital spending. Second, its $0.8 million write-off in 2025 was not charged against ongoing earnings because that money was already spent. Third, we excluded non-cash gains from revaluing warrants in 2019 and 2021. Over the past decade, inventory and other working capital absorbed about $9 million of cash as revenue grew from $17 million to $41 million. That cash is not deducted from our earnings figure, so any future growth would need more of it. Starting point. Revenue is lumpy because it depends on the timing of military orders. So we use the median of fiscal 2019 through 2025, a period that includes both the 2021 trough and the 2025 peak. That median is about $2.6 million a year, or roughly $0.38 a share on 6.94 million diluted shares. We did not start from fiscal 2025 because it looks like a peak. Periscope orders fell 42% that year to $11.5 million. Periscope backlog dropped from $22.7 million to $15.0 million, and total backlog fell from $44.2 million to $39.1 million. In the first nine months of fiscal 2026, new orders fell another 19% to $19.5 million and revenue was $28.5 million against $30.0 million a year earlier. Management blamed lower periscope demand on increased competition. Those nine months point to roughly $2.8 million of owner earnings for the full year, close to our starting level. Owner earnings grew about 59% in fiscal 2025. Our base case assumes no growth from the $2.6 million level in its first year, which is already a step down from 2025. Base case, $4.26 a share. Earnings hold at about $2.6 million a year for 15 years. Two things support that. The company holds four open U.S. government contracts for periscopes, vision blocks and collimators, with ordering periods that run to July 2030. It also has a long record of supplying replacement vision parts for vehicle fleets that remain in service. After year 15, earnings fade to zero over ten years: today's vehicle fleets are due to be replaced, and nothing in the filings shows Optex has secured a place on the successor vehicles. No growth is credited, because the company's past revenue gains came from winning individual orders rather than from a steady, repeatable process. The company has no bank debt and held $6.2 million in cash at the end of June 2026, so the balance sheet adds little risk. Bear case, $1.61 a share. Competition keeps taking periscope business, revenue drifts back to the low $20 millions seen in 2022, and earnings settle at about $1.3 million a year, similar to 2018 and 2022. After ten years no replacement business appears, and earnings fade to zero over five years. Several facts make this credible. Five customers supply most of the revenue. About 99% of contracts can be cancelled by the customer for convenience, although the company would recover its costs plus a fee. At the 2025 year-end, $1.1 million of backlog was tied to two government prime contracts that were being terminated. Bull case, $7.33 a share. The laser filter business keeps its momentum; filter orders were $10.2 million in 2025, up 11%. Gross margin stays near the 31% to 34% reached in fiscal 2026 now that older loss-making contracts have been completed. Earnings hold at about $4.0 million a year, between the 2024 and 2025 results, for 20 years and then fade over ten. We did not credit the pending bid for a new multi-year periscope and infrared filter contract or the new Optex Outdoors consumer line, because neither has produced proven revenue yet. All three cases discount future cash at 6% a year. The main risks to this valuation are the loss of a major defense customer and the absence of follow-on periscope contracts after the current ones end in 2030. On the other side, winning positions on new vehicle programs would add value we have not counted. The margin-of-safety price is about $2.50 a share, roughly 40% below the base case. That discount is large because Optex is a very small defense subcontractor with lumpy revenue and heavy customer concentration. At that price, the starting level of owner earnings alone would equal about 15% a year of the price.