We came across a bullish thesis on Innovative Solutions and Support, Inc. (NASDAQ:ISSC) on a substack called “Undervalued and undercovered” by Hugo Navarro. We will summarize the bull’s thesis on ISSC in this article. ISSC shares have been trading at $7.34 as of Oct 16th. ISSC’s trailing P/E is 19.32 times according to Yahoo Finance.
Alexey Y. Petrov/Shutterstock.com
Innovative Solutions and Support (NASDAQ:ISSC) is a significant player in the avionics sector. It specializes in advanced cockpit systems for both commercial and military aircraft. The company operates in three main segments:
- Product Sales: ISSC provides equipment to various clients. This includes OEMs, commercial air transport carriers, and government entities like the Department of Defense (DoD). The product line has expanded beyond flat panel display systems (FPDS) to include autothrottles and utility management systems (UMS). It has also been bolstered by contracts with major OEMs like Pilatus and Boeing.
- Customer Service: This segment offers maintenance, repair, and upgrades, benefiting from a recent acquisition of Honeywell product lines. This is expected to generate around $20 million in sales for 2024.
- Engineering Development Contracts: This segment–which yields low margins–accounts for less than 4% of ISSC’s revenues. The company has been focusing more on higher-margin opportunities.
ISSC generates revenue primarily through long-term contracts with established OEMs. It is capitalizing on predictable income from platforms like the Pilatus PC-24 aircraft, Boeing T-7A Red Hawk, and Boeing KC-46A tanker. The company’s recent acquisition of Honeywell product lines enables ISSC to enhance customer relationships and create cross-selling opportunities.
By targeting underpenetrated markets—particularly in the military sector—ISSC is positioning itself for significant expansion. The company also focuses on cockpit automation technology, which is anticipated to grow significantly and enhance safety while reducing pilot workload. The autonomous flight market is projected to be a multi-billion dollar opportunity.
Under the leadership of CEO Shahram Askarpour–who holds a 2.71% ownership stake–ISSC has successfully turned around its operations. The company has achieved a revenue compound annual growth rate (CAGR) of over 20% since 2018. Management remains optimistic about sustaining double-digit organic growth and potentially growing revenues beyond $100 million.
For FY 2024, ISSC could close its final quarter with a 10% revenue increase, although margins may slightly decrease in the short term. However, the potential for a 350 basis point margin improvement exists when factoring in one-time events–as noted by the CEO.
Looking ahead, ISSC is expected to achieve close to $100 million in revenue by 2029. This will be driven by double-digit compound annual growth rate (CAGR) and a gradual margin recovery. The company has a stabilizing backlog of $9.3 million and recently secured a multi-million-dollar military contract.
Valuation metrics indicate that ISSC has historically traded at high multiples, including EBIT multiples in the high teens and P/E ratios in the 20s. As the company normalizes margins and accelerates growth, the target price in the base case scenario is projected at $21.4 in 2029. That’s an implied upside potential of 200%.
Regardless, there are still some risks to monitor. Margin must improve, and the low current market visibility can continue keeping the stock under the radar. There is also the potential for a takeout at a cheap price if a downturn hits–and, of course–there’s the inherent volatility of the small-cap aerospace sector.
Innovative Solutions and Support, Inc. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 6 hedge fund portfolios held ISSC at the end of the second quarter which was 6 in the previous quarter. While we acknowledge the risk and potential of ISSC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ISSC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and 10 Best of Breed Stocks to Buy For The Third Quarter of 2024 According to Bank of America.
Disclosure: None. This article was originally published at Insider Monkey.