We came across a bullish thesis on Innovative Solutions and Support, Inc. (ISSC) on Substack by Maksim. In this article, we will summarize the bulls’ thesis on ISSC. Innovative Solutions and Support, Inc. (ISSC)'s share was trading at $6.89 as of March 17th. ISSC’s trailing P/E was 18.13 according to Yahoo Finance.
A pilot in the cockpit of a widebody commercial aircraft, highlighting the level of expertise of the aircraft leasing industry.
Innovative Solutions & Support, Inc. (ISSC) is an underappreciated aerospace company that has transitioned from a volatile aftermarket business to a more stable, high-margin OEM player. This transformation remains largely unrecognized by the market, creating an opportunity after a 40%+ drop in the stock price following an earnings miss and broader market weakness. The decline has pushed ISSC’s valuation below the $7.25 per share acquisition offer made just nine months ago by its largest shareholder, Christopher Harborne, which the board rejected. With management taking steps that indicate potential M&A activity, such as amending executive contracts for financial protection in a Change of Control event, another bid could emerge. The CEO, holding 5% of outstanding shares, has performance stock units that vest at higher price levels, reinforcing incentives to drive valuation growth. Additionally, management’s decision to cover taxes on restricted stock units from personal funds instead of selling shares signals confidence in ISSC’s long-term prospects.
Even without an acquisition, ISSC offers a strong risk-reward profile. The stock could return to the $11-12 range as the market reassesses its earnings power. Harborne’s past selling behavior suggests he views $11 as a fair valuation floor, and the stock overhang from the estate of ISSC’s late founder has largely cleared. More importantly, ISSC has spent over a decade shifting toward OEM sales, now comprising 75% of revenue, further stabilizing its business. The 2023 acquisition of Honeywell’s military product line solidified this shift, improving revenue predictability while generating consistent internal cash flow. This allows ISSC to fund further strategic acquisitions without excessive leverage.
Despite recent margin pressure due to acquisition-related costs and inventory adjustments, management expects EBITDA margins to normalize. Growth in the military segment has temporarily weighed on gross margins, but operating leverage will drive improvements. The company’s long-term positioning remains strong, with ISSC acting as a premier systems integrator in flight navigation and precision instrumentation. Its reputation for cutting-edge technology and vertically integrated production provides a competitive advantage, fostering relationships with key aircraft manufacturers, operators, and defense organizations.
ISSC’s growth strategy includes both organic expansion and acquisitions. The 2023 acquisition of Honeywell’s inertial, communication, and navigation product lines immediately strengthened ISSC’s position in the business aviation sector, expanding sales opportunities among 737, 757, and 767 operators. By Q4 2024, management confirmed that revenue synergies were materializing, with revenue growing 36% and EBITDA expanding 50%. The September 2024 acquisition of F-16 flight control and mission computers further bolstered ISSC’s defense portfolio, strengthening its relationships with prime contractors like Lockheed Martin. These moves align with the U.S. military’s increasing focus on advanced avionics and autonomous flight systems, positioning ISSC for long-term defense contract growth.
Structural tailwinds such as tariffs on foreign manufacturing and reshoring trends also favor ISSC. Its fully U.S.-based, vertically integrated model allows for cost-effective production, shielding it from supply chain disruptions. This advantage could enable ISSC to acquire distressed competitors reliant on offshore suppliers, further consolidating market share. The company’s ongoing facility expansion in Exton, Pennsylvania, will more than triple production capacity by mid-2025, with minimal capital outlay funded through earnings, reinforcing ISSC’s disciplined capital allocation strategy.
ISSC presents an attractive investment with multiple catalysts for growth. Management’s guidance points to significant EBITDA expansion in 2025, driven by better fixed-cost absorption and increased maintenance, repair, and overhaul activity. With organic revenue growth expected at 10-15% annually and 40-50% including acquisitions, ISSC could reach $100 million in revenue within two years. Assuming valuation multiples of 12-15x EBITDA, the stock’s upside potential ranges from 75% to as much as 3-5x its current price. Harborne’s prior acquisition offer and share sales suggest a clear valuation framework, further supporting the investment thesis. With a growing $81 million backlog ensuring revenue visibility and a de-risked balance sheet, ISSC is positioned for a significant re-rating. Given its recent pullback, the current stock price offers an attractive entry point, with plans to add on further dips, capitalizing on ISSC’s long-term potential.
Innovative Solutions and Support, Inc. (ISSC) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 10 hedge fund portfolios held ISSC at the end of the fourth 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.
