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iRhythm Technologies (NASDAQ: IRTC)

If you’ve ever had a friend or family member have their heart tested, you’ve probably seen the legacy Holter monitor – it’s all wires, electrodes, and an uncomfortable 48-hour test window.

But over the last ten years, San Francisco-based iRhythm Technologies has been displacing this legacy technology with their Long-Term Continuous Monitoring (LTCM) solution.

We’ve followed iRhythm (NASDAQ: IRTC) for over six years after first encountering them on a company ideas trip. We previously owned their smaller listed competitor, BioTelemetry until this was taken over by Philips in 2021.

What attracted us to iRhythm was the growth of its end-market where the company is the market leader. That leadership meant iRhythm commanded a premium valuation in the past.

Source: Bloomberg. Data as of 30 April 2025. Ophir.

But then in recent years various reimbursement and industry-wide DOJ (Department of Justice) issues have acted as an overhang on the stock.

This presented us with the opportunity to initiate a position towards the end of 2024 with our investment thesis being predicated on:

• Top-line growth beating market expectations
• Growth optionality from international markets and new devices
• Multiple expansion as the market is willing to pay a more premium valuation as growth accelerates

A Market in Motion – and iRhythm is Leading the Dance

As mentioned, the market for ambulatory cardiac monitoring (ACM) – basically testing for irregular heartbeats that are symptoms of heart disease – is undergoing a secular shift away from Holter monitors toward longer-term, wearable, mobile-enabled cardiac patches.

iRhythm pioneered the Long-Term Continuous Monitoring category, and patients are tested with a 14-day wearable patch. The patch captures higher diagnostic yields, is easier for patients, and integrates seamlessly with digital workflows.

The current ACM total addressable market (TAM) in the US is ~27 million patients. This is based on the number of patients presenting in primary care who may be symptomatic or at-risk for arrhythmias. Due to the ageing population and prevalence of chronic disease, the TAM is growing at mid-single digits.

However, only ~25% of that base is currently being tested.

Source: iRhythm Technologies First Quarter 2025 Results: May 1, 2025. Ophir.

We estimate the actual testing market is growing at high-single digits and within that the LTCM segment is growing at 15–20%.

We expect this growth to continue for several reasons:

1. The legacy Holter monitor will continue to cede share to LTCM: Holter had 80% of the market in 2018, but that has fallen to 40% currently and continues to trend lower.
2. Testing rates will continue to increase: With testing rates currently at ~25% we expect this to increase. This will be driven by the Primary Care Physician (PCP) channel, which has been experiencing consolidation by private equity groups in recent years. Increased rates of testing have the potential to lower the total cost of care for these groups. For example, 30% of all strokes are caused by Atrial Fibrillation – a common heart rhythm disorder tested for by ACM.
3. iRhythm is taking share in LTCM: iRhythm currently has ~70% share of the LTCM market. We recently met with competitors who confirmed iRhythm has recently been taking incremental share.

The Beat Goes On – iRhythm’s revenue to beat while margins expand

The market has been assuming revenue growth slows to mid-teens, however we believe 20%+ top-line growth is sustainable for the next several years for the reasons mentioned above.

At the same time, iRhythm’s margin story is playing out nicely. We expect its selling & marketing spend to be stable at ~15% of revenue, with general & administrative costs to be largely flat.

This would drive a significant beat to the streets 2025 EBITDA expectations of ~$55m.

Top line optionality exists

On top of that, international expansion is in its infancy – the global market is a $US1 billion+ TAM and largely untouched by the competition.

Source: iRhythm Technologies First Quarter 2025 Results: May 1, 2025. Ophir.

iRhythm isn’t stopping with LTCM.

In 2026, they’re launching a new Mobile Cardiac Telemetry (MCT) product, allowing for further market share gains. MCT is a method of continuously monitoring a patient’s heart rhythm and electrical activity using a small, portable device that transmits data wirelessly to a monitoring centre. This would open up another 20-30% revenue opportunity. There has been evidence of early execution here via the Zio AT, iRhythm’s existing MCT device. This has been the main source of upside surprise from recent growth.

DOJ cases likely just a short-term distraction

Some investors may shy away because of a lingering DOJ investigation, which was announced in May 2023.

The case is part of a broader ACM industry probe (BioTelemetry, Boston Scientific, and Proventice all received similar inquiries). Proceedings revolve around a narrow document production request tied to attorney-client privilege.

iRhythm’s legal counsel is recommending the company defend the privilege to avoid setting a damaging precedent with the court hearing scheduled for December 12.

Based on the discussions we have had with legal experts, we believe this to be a short-term distraction that will soon be in the rear-view mirror.

Why we hold following the recent bounce – Growth on growth on growth

iRhythm just reported their first quarter 2025 results, which saw the stock up ~20%.

The result showed the initial stages of our thesis playing out with iRhythm upgrading its guidance for revenue and EBITDA margin.

However, we believe iRhythm is only at the beginning of a multi-year period of elevated top-line growth and expanding margins, supported by optionality, which will drive a multiple re-rating.

We think the stock deserves to trade 6-8x forward sales (vs ~5.5x today), aligning it with other 20%+ growth MedTech names.

And while many think the music is slowing – we think iRhythm is only just starting to feel the rhythm.

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AAR Corp. (NYSE: AIR)

The aviation supply chain crisis

Have you been wondering why there are so many more delayed flights since COVID? It’s because manufacturers are struggling to clear production backlogs, so planes are getting older.

We started thinking about who could benefit from this dynamic and it led us to our recent investment: Chicago based Aerospace and Defence company, AAR Corp (NYSE: AIR).

The aviation supply chain crisis

We have closely followed the global aviation supply chain for several years, and we have owned various companies from the sector during this period. However, we recently started digging deeper into the space following the persistent disruptions to both aircraft and engine production.

Manufacturers, most notably Boeing & Airbus, have struggled with supply chain bottlenecks, labour shortages and material constraints, all of which has led to delays in new aircraft deliveries and spare parts.

Airlines and operators have been forced to extend the life of their existing fleets. That has increased demand for maintenance, repair, and overhaul (MRO) services, as well as driven a surge in the used and surplus parts market.

Source: Company Reports, KeyBanc Capital Markets Inc.

All of this comes as the global commercial fleet already has an average aircraft age of ~15 years vs retirement age of ~23 years.  At the same time, we will likely see sustained growth in global passenger miles for the foreseeable future.

Source: IATA, Airline Monitor, KeyBanc Capital Markets Inc.

On the hunt for who could benefit

Given this backdrop, we asked: which small-cap companies could benefit from this dynamic over the medium-long term? We met with a multitude of players in the ecosystem, including:

• Parts distributors/MRO (maintenance, repair and overhaul) operators like VSE Corp (NASDAQ: VSEC);
• Original Equipment Manufacturer (OEM) suppliers like Woodward (NASDAQ: WWD), recently listed Loar (NYSE: LOAR) and Montana Aerospace (SWX: AERO); and
• Aircraft/engine lessors like Willis Lease Finance Corp (NASDAQ: WLFC).

We even flew to Montreal to meet CAE (TSE: CAE), the global leader in simulation-based training for aviation.

But we found one stock that stood out – AAR Corp (NYSE:AIR).

AAR gave us by far the cheapest and least-discovered exposure in the sector.

That naturally warranted a deeper dive. So, we contacted the company for a meeting and got on the next flight to Chicago.

At the time of our meeting, thousands of investors were downtown for the industrial sector’s Baird Industrial Conference – only 25 miles away – missing what we believed to be the main attraction! (As serial entrepreneur and PayPal co-founder Peter Thiel famously said, “the most contrarian thing of all is not to oppose the crowd, but to think for yourself.”)

Digging a little deeper into AAR

AAR Corp is an independent provider of aviation services to commercial and government customers worldwide.

The company purchases, sells, and leases new and used commercial jet aircrafts. It also leases a variety of new, overhauled, and repaired engines and engine products for the aviation aftermarket.

Operations are categorised across three core segments:

• Parts Supply
• Repair & Engineering; and
• Integrated Solutions

(Expeditionary Services is a largely immaterial legacy segment).

Business Segment Overview

Source: AAR Corp

AAR differentiates itself from its larger OEM competitors, by offering independent aftermarket solutions. This enables airlines, MRO’s, and military operators to reduce costs and improve supply chain efficiency.

What we’re most excited about

The secular tailwinds supporting growth in both parts supply and MRO activities is attractive. However, we are most excited about the potential for AAR to double market share in parts distribution.

AAR is the largest independent supplier/distributor of factory new parts, with approximately 10% market share. AAR look to partner with OEM suppliers on an exclusive basis to sell their product into the aftermarket (the market for replacement parts and accessories) – that is, they effectively act as a sales force extension for OEM suppliers, allowing the OEM suppliers to leverage AAR’s global sales network and relationships.

Satair (Airbus subsidiary) and Aviall (Boeing subsidiary) are the two largest competitors in this market with an estimated combined market share of 40-50%.

However, OEM suppliers and airline/MRO customers are increasingly partnering with independents like AAR because they offer greater pricing flexibility, better aftermarket reach, and faster inventory turnover.

Our recent channel checks suggest this dynamic is still in its infancy.

Over the next 3-5 years, we believe AAR can more than double their market share, significantly outgrowing the aftermarket industry.

Parts Supply: Distribution

Source: AAR Corp

Used Serviceable Market recovery provides a nice hedge

The USM division focuses on sourcing, repairing, and reselling used aircraft components, primarily engine materials. Instead of purchasing directly from OEM’s, AAR procures parts from lessors, airlines, and MRO’s, often from retired or surplus aircraft.

These parts are then inspected, repaired, and recertified before being resold into the aftermarket, providing a cost-effective alternative to new OEM parts.

This model is particularly attractive due to strong demand for engine materials amid supply constraints from OEM’s, making USM a high-margin and growing segment of AAR’s business.

Given the supply chain issues noted above, USM has been subdued primarily due to lower-than-expected aircraft retirements, which limits the supply of used parts.

If new aircraft deliveries accelerate and airlines phase out older fleets, we expect the USM business to recover, which often comes at higher margins. This provides a natural hedge to the business should we see any slowdown in aftermarket/MRO activity.

A win-win scenario

Having mapped out the whole ecosystem, we believe AAR offers the best return profile across the widest variety of industry outcomes.

Its USM business will benefit if aircraft production rates normalise and more planes are retired and stripped for their parts. But AAR will gain share in parts distribution.

Most other companies only win if one outcome is true.

Source: Ophir, Bloomberg.

As seen in the chart above, AAR has been delivering sound earnings growth with a largely unchanged multiple since September 2021.

We expect top-line growth combined with operating leverage to drive ~20%+ EPS CAGR over the next three years.

This will aid in deleveraging the balance sheet from the current 3.2x net debt to EBITDA level with management targeting 2.0x “two years after the recent Triumph acquisition”.

This will likely drive a multiple re-rating, with AAR currently trading on ~14x our next twelve-month EPS versus the closest peers VSEC on ~24x.

So next time your flight is delayed, it’s probably because the aging plane needs a new part, and AAR could be the one to provide it.

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