We came across a bullish thesis on Innovative Solutions and Support, Inc. (ISSC) on Substack by Hugo Navarro. In this article, we will summarize the bulls’ thesis on ISSC. Innovative Solutions and Support, Inc. (ISSC)’s share was trading at $10.74 as of Feb 10th. ISSC’s trailing P/E was 26.85 according to Yahoo Finance.
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Innovative Solutions & Support (ISSC) has experienced impressive growth since the publication of its initial investment thesis, with the stock returning 64%, achieving an internal rate of return (IRR) exceeding 100%. Despite these strong gains, ISSC’s future outlook remains highly promising, underpinned by robust revenue growth, improving profitability, and a growing backlog fueled by strategic acquisitions, particularly from Honeywell. For fiscal year 2024, the company reported a significant 35.6% increase in revenue, reaching $15.4 million in Q4 alone, an 18% year-over-year jump. Net income rose by 16%, while EBITDA grew 36%, nearly tripling its level from three years ago. Operating cash flow and free cash flow also saw impressive growth, with the latter reaching $5.1 million, up from $1.8 million the previous year. This strong cash flow generation, coupled with a relatively low net debt of $27.5 million, positions ISSC well for continued investment and growth.
Management remains optimistic about the future, projecting another year of 30%+ revenue growth, driven by healthy end markets and additional synergies from its Honeywell acquisitions. A major driver of this growth is the company’s expanding backlog, which reached $89.2 million by the end of September 2024. Notably, the company recently added $74.3 million in backlog from a Honeywell product line acquisition, further strengthening its position. The backlog includes significant long-term military programs with major players such as Boeing and Lockheed Martin, which should help support revenue in the coming years. Although the gross margin on these military contracts may be lower, management expects most of the profit to flow through to EBITDA due to economies of scale and stable overhead costs.
ISSC is also expanding its production facility by 100%, a $6 million investment that will allow the company to in-source more component assembly, thereby capturing higher margins. This production capacity expansion, combined with the strong defense pipeline and the recent ThrustSense Autothrottle contract with the U.S. Army, positions ISSC to potentially surpass $100 million in annual sales sooner than expected. Despite the stock’s recent gains, trading at around 17x EV/EBITDA, the company’s strong growth trajectory and rising EBITDA margins could still justify further upside, with the possibility of the stock tripling in value. While insider Christopher Harbonne has reduced his stake by 10%, his remaining position still signals confidence in the company’s future prospects. Investors should weigh the current valuation and potential risks when considering new positions in ISSC, though the company’s solid fundamentals and growth prospects suggest it remains a compelling investment.
Innovative Solutions and Support, Inc. (ISSC) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 6 hedge fund portfolios held ISSC at the end of the third 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.
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Disclosure: None. This article was originally published at Insider Monkey.