Innovative Solutions & Support Inc. The follow-up analysis By Wei Lik Leong, 5-3-2005
Outline Quick Recap Porter’s 5 Forces Financial performance Valuation Recommendation A quick look at what the company does and why it’s interesting in our context.
Quick Recap 4 main products: Air data systems, Fuel Gauges, Engine Indicators and Integrated Flat Panel Display. Experienced management Success in a highly regulated environment Favorable FAA Regulation – Reduction in Vertical Separation requirement in the busiest air space over the majority of the US. Main source of revenue comes from the RVSM compliant air data products that they sell. Main market: retrofit Looking to expand into a new product area: integrated flat panel display with applications in the cockpit to manage flight information. Management has many years of experience in the avionics industry: the CEO and Chairman is himself an accomplished inventor and Engineer While other businesses related to the aerospace industry have floundered after sep 11, ISSC has managed to turn a profit in those lean years. The January 2005 deadline for compliance regarding the new RVSM regulation has sent carriers scrambling to ISSC for retro-fitting. Increase in the company’s backlog indicates that despite increased capacity, ISSC could not fill all the orders in 2004. As such, strong demand is expected to carry into 2005.
Porter’s Five Forces Threat of New Entrants – High Threat of substitutes – Low/High Bargaining power of buyers – Low/High Bargaining power of suppliers – Low Rivalry among existing competitors – Low/High High profit margins earned by ISSC indicates that ISSC has strong bargaining power wrt to its suppliers and buyers because of its intellectual property and reputation in the retrofit industry. There are only two other companies that compete directly with ISSC in the RVSM compliant instruments but in the other areas face competition from big names like Honeywell.
Financial Performance Return on Equity = 26.46% Return on Assets = 23.17% Profit Margin = 31.27% 52 wk price range: $16.06 – 35.85 Last close = $31.60 Very low market debt to equity ≈ 1% Trailing P/E is about 19 and forward P/E is 15.41
Industry comparison ISSC HON ROK Smiths Grp Industry Market Cap: 30.76B 8.75B N/A 346.51M Employees: 129 109,000 21,000 267,291 1.20K Rev. Growth (ttm): 63.70% 10.80% 7.50% 13.30% Revenue (ttm): 64.66M 25.88B 4.74B 4.97B1 241.19M Gross Margin (ttm): 68.33% 19.85% 36.89% 25.73% EBITDA (ttm): 30.66M 2.75B 839.00M 23.87M Oper. Margins (ttm): 47.42% 6.81% 12.99% 7.33% Net Income (ttm): 20.22M 1.35B 485.00M 387.50M1 11.82M EPS (ttm): 1.664 1.562 2.574 0.83 PE (ttm): 18.99 23.15 18.46 19.52 PEG (ttm): 1.41 1.47 1.05 1.36 PS (ttm): 5.79 1.19 1.84 1.11
5 Year Chart
1 Year Chart
DCF analysis Projections for the next 5 years (FY2005 - 2009) Calculated a WACC of 11.57% based on CAPM. Very low market debt/equity ratio and lack of long term debt implies that cost of equity ≈ WACC Sensitivity analysis on WACC vs Sales growth and COGS. Result for base case: Stock price = $33.05 Range: $24.37 - 39
Multiples analysis Estimated possible share price using forward P/E and EBITDA multiple. Result for the base case: P/E valuation $37.24 EBITDA valuation $26.70 P/E and EBITDA valuations give the extreme high and low estimates for stock price
Recommendations Stock looks promising and worth following. Add Innovative Solutions and Support to the watch list. Rationale: Currently fairly valued “orphan” holding more appropriate, given the time frame, for next class to evaluate the stock and decide on the right course of action to take.