This US stock is a name most UK investors have likely never heard of, but it is currently showing the kind of momentum that usually precedes a major re-rating.
Innovative Aerosystems (NASDAQ:ISSC) — previously known as Innovative Solutions and Support — has seen its share price rocket in recent months. But despite a 100% gain over the last quarter, my analysis of the company’s new IA Next strategy suggests the market is still significantly behind the curve.
Firstly, what does it do?
Well, the company manufactures advanced flight deck avionics. This includes autothrottles and integrated cockpits for commercial and military aircraft. For a more detailed explanation, you can also check out the company’s website.
The metrics really matter
As an investor who prioritises growth-oriented investments backed by hard data, I’m rarely swayed by story stocks or invest on a hunch. Thankfully, the numbers here are compelling.
In its latest fiscal results, Innovative Aerosystems reported a 45% year-on-year revenue jump to $84.3m. But more importantly, the company has unveiled a 2029 target of $250m in revenue with adjusted EBITDA margins of 25%-30%.
To put that in perspective, management is planning to nearly triple the size of the business in just four years.
Usually, such aggressive scaling comes at the cost of profitability. But, by tripling their manufacturing capacity in Pennsylvania and bringing production in-house, ISSC is actually protecting its margins.
So, let’s take a closer look at this 2029 target. At the higher end of the margin guidance, Innovative Aerosystems would deliver adjusted EBITDA around $75m. That’s up from $23.8m over the past 12 months.
Where might we find fair value?
Companies in the industrials sector currently trade with a forward enterprise-value-to-EBITDA ratio around 12.8 times. Defence stocks typically trade a little higher, but let’s apply this forward ratio to Innovative Aerosystems.
Excluding the modest debt on the balance sheet, the company could be trading around $52.70 based on the upper end of these targets and the current forward multiple. Yes, this isn’t a perfect calculation, but it does give an idea of where the stock could be going.
And this $52.70 figure is 173% above the current share price.
Inorganic growth
The business is pursuing both organic growth — coming from what’s already inside the company — and inorganic growth — takeovers. With a fresh $100m credit facility and a leverage ratio of just 0.9 times, ISSC has the capacity to acquire smaller avionics firms at attractive prices.
Of course, there are risks. Integration of new acquisitions can be messy, and the aerospace sector is famously cyclical. However, with the company now manufacturing 100% of its products in its own facility, it has the operating leverage to turn every new dollar of revenue into impressive gains for shareholders.
So, do I think it’s worth considering? Absolutely.
