Investment Review №352. Playing Defense
Vadim Merkulov
Head of Analytics department
Innovative Aerosystems. Higher and Higher
IA shares are a Buy with a price target of $31
About company
The company is in an accelerated growth phase after evolving from a niche avionics supplier into an integrated platform spanning commercial, business-jet, and defense aviation. Organic growth, M&A-driven product line expansion, operating leverage, and strong FCF generation position IA for continued earnings expansion and stock revaluation.
Price dynamics IA, $
Key Investment Theses
Solid quarter. In Q3 2026, revenue rose 10.7% YoY to $26.7m despite a tough prior-year comparison from elevated F-16 deliveries, driven by commercial and business aviation as well as recent acquisitions. Quality improved meaningfully: gross margin expanded to 51.7% from 35.6%, and adjusted EBITDA increased 74.7% YoY to $7.7m, reflecting a richer mix of aftermarket services and high-margin avionics, as well as strong operating leverage. Growth visibility remains high, with an order backlog of $82.9m at the end of June and quarterly bookings of $22.7m. For 9M26, CFO grew 50% to $15.5m, while FCF increased 155% to $12.3m. Leverage remains manageable at 1.4x net debt/LTM adjusted EBITDA, and available liquidity of $53.7m supports acquisition integration and further targeted M&A without materially pressuring the balance sheet.
Key growth driver: expansion of the addressable market. In addition to selective acquisitions of product lines from blue-chip OEMs such as Honeywell and Moog, IA acquired Aydin Displays, strengthening its military-aviation footprint and gaining access to naval and ground defense segments. The company also secured its first major order for the Liberty Flight Deck platform from a Japanese eVTOL developer, reducing reliance on legacy programs and launching a new multi-year supply cycle across cockpit modernization and emerging electric-aviation segments.
Management maintains its long-term revenue target of $250m. Based on our latest estimates, IA can reach $139m in organic revenue and $39m of adjusted EBITDA in 2028, implying an adjusted EBITDA CAGR of approximately 19% over 2025–2028.
Key risks include M&A integration, partial reliance on defense contracts and F-16-related programs, execution risk on new programs, and rising interest expense.
We rate the stock Buy with a $31 price target. A stop-loss at $15.50 is advisable.
