Andrew Rem of Odinson Partners presented his investment thesis on Innovative Solutions & Support (US: ISSC) at Best Ideas 2024.

Thesis summary:

Innovative Solutions & Support (ISSC) operates as a systems integrator and manufacturer, specializing in air data equipment, engine display systems, and cockpit display systems (aka Flat Panel Display Systems-FPDS).

The company, under new leadership of Shahram Askarpour, since the passing of Founder Geoffry Hedrick in early 2022. He is focusing on digitizing cockpits with flat panel screens and advancing towards a more autonomous future. ISSC serves various end markets, including commercial air transport, general aviation, military, OEMs, and aftermarket clients. Notably, the company provides unique safety features like the ThrustSense AutoThrottle.

Despite historical periods of growth followed by retrenchment, ISSC has shown consistent top-line growth since FY18, with FY23 marking the fifth-consecutive year of growth at $35 million in revenue.

The recent acquisition of Honeywell’s radio communication and navigation product lines enhances ISSC’s suite, with EBITDA margin improvement and cross-selling opportunities. While customer concentration exists with Pilatus, a 40% revenue contribution from the Honeywell acquisition provides an offset.

ISSC’s competitive advantage lies in faster installation times compared to competitors, unique products like ThrustSense AutoThrottle, and their utilities management system.

Key risks include customer concentration and potential challenges in IP protection, technology, and cyclicality.

ISSC’s financials reveal strong revenue growth, improving margins (on par with best-in-class) and strong cash flow. Although the Honeywell acquisition (6/30/23) did add leverage to the balance sheet, they have already taken leverage down by 0.5x to 2.1x, and there is a pathway to exiting FY24 with leverage under 1x. The company’s valuation metrics, while seemingly high on a trailing twelve month basis, are expected to normalize given the material impact of the Honeywell acquisition.

ISSC stands out in the aerospace and defense sector with its robust financial performance, strategic M&A potential, and focus on innovation, positioning it for continued success in the evolving aviation landscape.

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About the instructor:

Andrew Rem had accrued just over two decades of institutional investment experience before launching Odinson Partners in 2022 as a long only investment manager, focused on small and microcap companies, with a long term investment mindset and a concentrated portfolio.

Previously, he was portfolio manager of Nuveen’s Small Cap Value strategies and covered consumer staples, healthcare and industrials. Prior to joining Nuveen he worked at Summit Creek Advisors, as a portfolio manager/analyst on their small-cap growth portfolio. Summit Creek was a spin out from Winslow Capital Management where he was an equity analyst on the small cap growth portfolio and ran their trading desk.

Andrew graduated with a B.S. in Business Management from the University of Utah and an M.B.A. with an emphasis in Finance from California State University, Fullerton. He also holds the CFA designation.