ONESPAN INC (NASDAQ:OSPN): A Peter Lynch GARP Investment Case Study

The investment philosophy of legendary fund manager Peter Lynch has long been a cornerstone for investors seeking to build wealth over the long term. Central to his strategy is the concept of Growth at a Reasonable Price (GARP), which focuses on identifying companies with solid, sustainable earnings growth that are not overvalued by the market. This approach avoids the extremes of speculative high-flyers and stagnant value traps, instead targeting businesses that are growing profitably and can be purchased for a sensible price. By applying a disciplined set of filters based on Lynch’s principles, investors can search for companies that embody this balanced investment thesis.

One company that recently appeared through a Peter Lynch-inspired screen is ONESPAN INC (NASDAQ:OSPN), a provider of digital security and e-signature solutions. The screen applies specific criteria to find firms with healthy growth, strong financials, and attractive valuations, key tenets of Lynch’s GARP philosophy.

Alignment with Peter Lynch's Core Criteria

Peter Lynch emphasized sustainable growth, financial health, and reasonable valuation. A review of OneSpan’s key metrics shows how it matches these pillars.

• Sustainable Earnings Growth: Lynch favored companies growing earnings per share (EPS) between 15% and 30% annually, as growth outside this range was often unsustainable. OneSpan’s five-year average EPS growth rate of 19.39% sits within this target zone, indicating a history of consistent, manageable expansion.
• Attractive Valuation via PEG Ratio: To ensure growth isn’t overpriced, Lynch used the Price/Earnings to Growth (PEG) ratio, seeking a value of 1 or less. OneSpan’s PEG ratio, based on its past five-year growth, is approximately 0.45. This suggests the market is valuing the company’s shares at a discount relative to its historical earnings growth, a positive signal for value-conscious growth investors.
• Strong Profitability (ROE): A high Return on Equity (ROE) indicates efficient use of shareholder capital. Lynch looked for ROE above 15%. OneSpan’s ROE of 24.40% not only clears this hurdle but places it in the top tier of its software industry peers, demonstrating superior profitability.
• Prudent Financial Health: Lynch was wary of excessive debt. The screen requires a Debt-to-Equity ratio below 0.6, with Lynch himself preferring levels under 0.25. OneSpan performs well here with a Debt/Equity ratio of 0.0, meaning it operates with no interest-bearing debt. This provides financial flexibility and reduces risk during economic downturns.
• Adequate Short-Term Liquidity: The screen also filters for a Current Ratio above 1, ensuring a company can meet its short-term obligations. OneSpan’s Current Ratio of 1.75 indicates a comfortable liquidity cushion.

Fundamental Health and Valuation Overview

A wider review of OneSpan’s fundamental analysis report supports the picture shown by the Lynch screen. The company receives an overall fundamental rating of 6 out of 10. Its strongest areas are Profitability and Health, where it scores a 7 out of 10 in each category. The profitability score is driven by good margins and returns, including an industry-leading Return on Invested Capital (ROIC) of 15.40%. The health score is supported by its debt-free balance sheet and a solid Altman-Z score, indicating low bankruptcy risk.

Perhaps most notable is its Valuation score of 8 out of 10. The report notes that OneSpan trades at a Price/Earnings ratio of 8.71, which is lower than nearly 90% of its software industry competitors and well below the current S&P 500 average. This valuation, combined with its profitability, forms the core of its GARP appeal. The primary area of concern is Growth, which scores a 3, as the company has seen recent revenue declines and is expected to deliver only modest EPS and revenue growth in the near term. This highlights the importance of the Lynch screen’s focus on past sustainable growth as a differentiator. You can view the full, detailed fundamental analysis for ONESPAN INC here.

Investment Thesis and Considerations

For an investor following Peter Lynch’s principles, OneSpan presents an interesting case. It is a profitable, debt-free company with a history of strong earnings growth that is currently trading at a valuation Lynch would likely describe as "cheap." The business operates in the essential and expanding field of digital transaction security, a "dull" but critical sector Lynch often favored. The low PEG ratio suggests the market may be undervaluing its historical growth path.

However, the Lynch strategy requires looking beyond the screen. The company’s recent revenue trends and muted growth forecasts highlight the need for deeper investigation. An investor must judge whether the past EPS growth is repeatable, understand the competitive dynamics in digital security, and review management’s strategy for re-accelerating top-line expansion. The lack of debt is a major strength, but the recent increase in shares outstanding is a minor negative noted in the report that warrants attention.

Find More Potential GARP Candidates

OneSpan shows how a systematic screen can identify companies that fit a disciplined investment framework. For investors interested in finding other companies that meet Peter Lynch’s criteria for growth at a reasonable price, the screen used to identify OSPN is available to view. You can find more potential candidates and run your own versions of the screen here.

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Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any security. The analysis is based on data and a specific investment strategy framework; it is not a substitute for personal research. Investing in stocks involves risk, including the potential loss of principal. You should conduct your own due diligence and consult with a qualified financial advisor before making any investment decisions.