In Search of Supernovas

04/29/2005 12:00 am EST

Focus:

Charles Norton

Editor-in-Chief, Supernova Stocks

In their newly-launched Supernova Stocks, co-editors Charles Norton and Ian Wyatt look for stocks with "characteristics of a true superstar." Here, Norton, who will make his first Money Show appearance in Las Vegas, discusses the first stock added to their new portfolio.

"Innovative Solutions (ISSC NASDAQ) makes products for airplanes that measure and display flight information, such as airspeed, altitude, and the like. The company is currently reaping a windfall due to a new mandate from the FAA that is designed to allow planes to fly vertically closer together. This so-called Reduced Vertical Separation Minimum (RVSM) rule requires airliners to be equipped with specially certified high accuracy measuring systems and the leading worldwide supplier of RVSM-certified equipment is Innovative Solutions.

"Over the past decade, the company has installed their RVSM gear on more than 2,000 aircraft in the US and Europe, but there are thousands more that need Innovative’s help in conforming to the guidelines. Growing backlog, up 39% in the latest quarter, is testament of the overwhelming demand. Some analysts believe it could take up to two more years before every plane is properly equipped, which could amount to a revenue opportunity of $100 million during that period. Not bad for a company that did only $57 million over the past 12 months.

"At some point, though, every plane that needs RVSM equipment will have it. Then what? Well, this is no one trick pony. Its next big opportunity is selling flat panel monitors for use in the cockpit, replacing the old analog screens. The firm currently supplies the Marine Corps’ landing crafts and Boeing’s tankers. In December, the company received an initial order for flat panel displays for Lockheed Martin’s C-130 cargo aircraft.

"The company’s financial statements have been flying high. Innovative’s income statement is first class. Sales growth has been 43% or higher for the past five quarters, and stood at 123% in the recently reported fiscal first quarter. Over that same time, earnings growth has been even more stellar, with four quarters of triple digit year-over-year gains. Most recently, earnings jumped a whopping 264% over last year’s fiscal first quarter. On an annual basis, earnings are expected to be a solid 64% higher in 2005 than in 2004.

"The financials are undeniably strong, and institutional investors have taken notice. Four quarters ago, only 13 funds held this stock. Now, 58 funds own shares. In our view, the company’s fundamentals are extraordinary: tremendous sales and earnings growth with a growing backlog; improving profitability with lush margins and a solid return on equity; a clean balance sheet with a cash pile that’s swelling from the company’s operating activities; and growing institutional interest facing limited supply. Add in a reasonable valuation, and the story only improves."

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