Innovative Solutions & Support Inc.

1. Innovative Solutions & Support Inc. The follow-up analysis By Wei Lik Leong, 5-3-2005

2. Outline • Quick Recap • Porter’s 5 Forces • Financial performance • Valuation • Recommendation

3. 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.

4. 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

5. 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

6. Industry comparison

7. 5 Year Chart

8. 1 Year Chart

9. 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

10. 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

11. 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.