Deep Dive: Innovative Aerosystems ($IA)

Some incredible compounders of the last few decades have built empires by acquiring small companies. Constellation Software in vertical software. TransDigm in aerospace. HEICO is another example. This playbook is difficult because it's easy to pay more than a company is worth. It is human nature to overestimate cost efficiencies or one’s own ability to cross-sell products in a new market. But it is an interesting mental model.

A few key features of the successful rollups are:

We have come across a small-cap company (<$400M EV) following a similar playbook in the aerospace industry. The industry is important, as aerospace components have a deep moat due to the strict certification process for firms. It’s still early, and they've only been at it for 3 years, but that is the opportunity for investors.

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Innovative Aerosystems is a small avionics systems integrator that designs, manufactures, and services high-performance avionics for commercial and military aircraft. Their expertise lies in creating complex systems that integrate mechanical, electrical, software, and avionics components. The company was called Innovative Solutions & Support until August 2026, and the ticker changed from ISSC to IA at the same time.

The platforms that innovative designs must be certified by the FAA (Federal Aviation Administration) or qualified by the military customer for defense platforms. Both are time-consuming and expensive. IA (Innovative Aerosystems) has both in-house capabilities and IP, and also acquires such technology from third parties, such as Honeywell, to create these platforms. Key customers include Boeing Company, Lockheed Martin, Textron Aviation, and Pilatus Aircraft.

The core of our thesis on IA rests on its acquisition engine. The products IA acquires are generally low-revenue items ($5M-$30M) or older/niche aircraft. Larger companies don’t want to dedicate resources to these platforms and sell them to smaller firms like IA. The key is that they sell to a capable company with a track record of integrating such platforms, since they don’t want their customers (who buy large platforms worth billions from them) to run into difficulties. The combination of the high technical capabilities required in aerospace, coupled with the moat of firms that have already integrated older ‘orphan’ lines, provides a tailwind for IA to scale revenue in the coming years.

IA currently has last twelve months revenue of $93M and adjusted EBITDA of $31M. Its 3 main business segments are:

In FY25, product sales accounted for 64% of revenue, and services accounted for 36%. Here is how the numbers have moved since the current CEO took over.

Aside from the above classification, IA’s work can be segmented into commercial and defense platforms. In FY25, ~36% of IA’s revenue came from Lockheed Martin (estimated at ~20% in FY26). We estimate that the overall defense portfolio generated ~40% of IA’s total revenue in FY25.

This segment is key because once you are inside the defense ecosystem and have earned the confidence of large defense contractors, you become one of the few trusted firms. This is steady recurring work. The Lockheed contract covers the F-16's flight control computer and display generator. IA holds the exclusive license for both, so it will earn from this portfolio as long as the F-16 flies. Lockheed has ~110-120 new Block 70/72 jets in backlog, and ~3,100 older F-16s are in service.

The stock peaked at ~$31 in April 2026 and currently is trading at ~$18 per share. The key reasons for the drop are:

The drawdown is due to multiple compression. In April’26, the stock traded at ~20x FY26E EBITDA, and at ~$18 per share it is ~13x. The September quarter is guided to $28M-$30M in revenue, up from ~$21M a year ago, so the F-16 gap should be behind them by the time FY26 results come out in December. The market is not giving credit for that yet.

IA sits between component manufacturers and aircraft OEMs or operators. It buys mechanical, electrical, and other parts, then adds value by integrating them into an integrated platform. It then gets them approved for use and sells them to OEMs such as Boeing and Lockheed Martin.

The key moat in this process is the certification. Avionics is key to safe flight, and replacing these components is unlike replacing a generic electronic component. The alternative part should work with the aircraft’s other systems, be certified by regulators, meet stringent operating parameters, and pass numerous tests.

For example, when IA acquired Honeywell's F-16 products, every unit built at IA's Exton plant had to be requalified with Lockheed before it could ship.

Aside from certification, the second moat is that many of these small product lines are virtual monopolies. Once a product is certified, the approval holder controls the design data, so repairs and upgrades run through them for decades. So once IA gets approval for a particular product, all repairs and upgrades come to them for decades. A 767 freighter plane whose inertial reference units need repair and which has been in service for 25 years will have to come to IA for repairs. This is why IA can earn ~50% gross margins on lines that Honeywell gives up. To compete, a rival would need to spend $8M-$20M on certification for a product that earns $5M-$15M a year (which would be a poor return).

IA’s strategy is to grow organic revenue by high single digits in the coming years. On top of that, they will acquire more orphan product lines that the larger companies don’t want to focus on.

Management has set a medium-term target of $250M in revenue with a 25-30% EBITDA margin by FY2029.

Organic growth comes from:

This section answers why larger companies sell mature product lines with 25-30% adjusted EBITDA margins to IA.

Let’s take Honeywell’s example. They are a large aerospace company catering to many SKUs and components. They need to drive innovation and compete for future programs like unmanned aircraft and the latest military aircraft. So, for them, running a separate assembly line for the F-16 flight computer or communication units is non-core. They cannot dedicate resources to so many small SKUs. Each such line may generate $5M-$30M in revenue.

So, to keep their customers happy (since the same customers will buy cutting-edge equipment from Honeywell), they will sell the rights to these smaller product lines to a company like IA. In our estimate, Honeywell would have achieved much less than 40% gross margins on these products, while IA can dedicate resources to improving and optimizing its profitability and achieve 40%-50% gross margins. This is a secular tailwind for IA, as it can continue to accumulate such ‘orphan’ platforms/products (Orphan lines or products are those that very few companies want to develop or sell due to the low revenue opportunity).

IA has done seven such deals since June 2023 (five of them with Honeywell). In total, it paid ~$110M for $65M-$75M of annual revenue, which works out to ~1.5x-1.75x sales. The cheapest was the F-16 line at ~0.5x sales. Honeywell was making less than 25% gross margin on it, which is why they sold. The most expensive deals were in 2026, at ~3x sales. At IA’s current margins, every $1 of acquired revenue generates ~16 cents of free cash flow a year, and IA has been paying ~$1.75 for it. The F-16 line is a good example of what IA does post-acquisition. Once IA moved the circuit-card assembly in-house, the line's gross margin rose from below 25% towards the company average of ~50%.

The key is to never overpay for such products and to drive strong ROI on the invested capital. This is what we think the current CEO has shown he can accomplish.

Shahram Askarpour was the engineering Vice President from 2003 to 2012 and then became the President from 2012 onwards. He became CEO in 2022, after IA’s founder and then-CEO, Geoffrey Hedrick, died in early 2022.

Here is a comparison of Innovative’s growth during the five years before the CEO transition and since the new CEO took over.

This is a key risk for the company. The architect of this new IA is Mr. Askarpour. It is not apparent to us that this sort of acquisition strategy can succeed under a new CEO (he is 68). This is indeed a special kind of investing acumen. Seen another way, the current CEO’s knowledge and depth of understanding of the business is a moat as well.