HEICO Will Reward Patient Shareholders (NYSE:HEI)


Overview

You would be hard-pressed to find a better-performing company over the last thirty years than HEICO (Heico) (NYSE:HEI). The aircraft parts maker has been a true beneficiary of the growth of commercial air travel over this time period.

Source: Heico May 2020 Investor Presentation

It is a true rarity to find a company that compounds earnings at 19% over such a long time period. The question is whether investors are getting a chance to buy shares at a discounted level due to pandemic-related concerns.

3rd Quarter Results

Heico has two main operating divisions, the Flight Support Group and the Electronic Technologies Group. Both groups represent approximately 50% of sales. The Flight Support Group has been severely impacted by the Pandemic while the other group has been unscathed.

Source: Heico May 2020 Investor Presentation

This week Heico reported results for the first nine months of fiscal 2020. In the first three quarters, net income increased 4% to a record $251.7 million. In the third quarter of fiscal 2020, net income was $54.3 million, or 40 cents per diluted share, as compared to $81.1 million, or 59 cents per diluted share, in the third quarter of fiscal 2019.

Heico also reported that the consolidated operating margin was 17.7% in the third quarter of fiscal 2020. The operating margin was 22.4% in the third quarter of fiscal 2019.

Breaking down the results by group paints a clearer picture. The Flight Support Group experienced a big drop in Q3 net sales to $178.2 million from $320.0 million. On the other hand, the Electronic Technologies Group increased its operating income by 2% to a record $184.9 million for the first nine months of fiscal 2020, while keeping it steady at $61.9 million for the third quarter of fiscal 2020.

President Eric Mendelson noted that it appears that business might have bottomed in June.

We were – back in May, when we said we were hopeful that May would mark the bottom, in fact, May was the bottom, and we were able to bounce nicely off of the May numbers into June and July. And I would say they were sort of consistent in that level. In terms of reviewing the businesses within the parts side, of course, we’ve got the PMA and we’ve got the distribution, and I would say that they were down sort of in the similar area. Repair was down a little bit more and that was to be expected as airlines we anticipated would reduce whatever expenditures that they saw.”

Liquidity

Heico is a conservatively financed company. The total debt to shareholders’ equity ratio was 37.9% as of July 31, 2020. The net debt to EBITDA ratio improved to .70x as of July 31, 2020, down from .93x as of October 31, 2019.

On the most recent conference call, CEO Laurans Mendelson highlighted Heico’s strong capital position as a competitive advantage to make acquisitions.

We have no significant debt maturities until fiscal 2023, and we plan to utilize our financial flexibility to aggressively pursue high-quality acquisitions to accelerate growth and maximize shareholder returns. I do want to point out that unlike some companies in the aerospace industry, HEICO did not have to go to the market to raise money at what I consider exorbitant rates of 8% or more. So we just went through this financially sound and I think that has really helped us and has proven to be an excellent strategy.”

As with any travel-related company, the first question is whether the company will survive to see the light at the end of the tunnel which may be in 2022. Heico should remain cash-flow positive as an overall entity due to the fact that half of the business is not exposed to commercial aircraft.

Valuation

Heico has never been a “cheap” stock. A company that compounds earnings at close to 20% a year rarely trades at a discounted valuation.

The current market cap is $13.2 billion. As mentioned previously, the company is conservatively financed with a low debt load.

The Price to Sales ratio is 7.4X which is actually lower than years past where the company often traded at over 10X sales.

Many investors would be taken aback by the Forward PE of 48.3X. The company is expected to earn ~$2.15 in each of the next two years. Thus, the PE ratio is not coming down any time soon. However, a year or two of earnings does not mean much when analyzing the value of a company. If Heico is able to normalize operations in 2022 and continue growing at about 20% per year, the PE ratio is relatively meaningless.

Conclusion

Heico will most likely emerge from the pandemic in a stronger competitive position. The company is conservatively financed and will most likely use its balance sheet strength to acquire smaller suppliers. If investors can look past the next two years of earnings which should flatline, Heico shareholders should be richly rewarded as operations normalize and the company continues its growth trajectory.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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