If you fly, regardless of what you fly, you’ve probably had indirect contact with the HEICO Corporation (HEI.A, Financial), even though you may never have heard the name. It’s an aviation and aerospace technology company that makes replacement parts and provides a host of other services and products to flying machines.
You can find it these days on GuruFocus’ Undervalued Predictable list, which is based on Discounted Cash Flow analysis and on how consistently a company can grow its earnings.
While I don’t believe the stock belongs in the undervalued camp, it does have an outstanding record for delivering consistently growing earnings, a 5-Star rating.
In this article, we’ll examine this lesser-known company and offer some thoughts on where it belongs in the pantheon of investable stocks.
History
1957: Heinicke Instruments formed, to design and sell lab equipment
1960: Company goes public
1974: Merger with Jet Avion Corporation and entry into aviation markets
1986: Name changes to HEICO Corporation
1990: Its laboratory products business is sold
1993: Flight Support Group is formed
1996: Electronic Technologies Group is formed
1999: HEICO shares are listed on the New York Stock Exchange
Based on information at the company website.
HEICO’s Business
In its online company profile, HEICO describes itself as "a successful and growing technology-driven aerospace, industrial, defense and electronics company. . . . HEICO's products are found on large commercial aircraft, regional, business and military aircraft, as well as on a large variety of industrial turbines, targeting systems, missiles and electro-optical devices.”
In its 10-K for 2015 (for the fiscal year ended October 31, 2015) it said, “HEICO Corporation . . . . believes it is the world’s largest manufacturer of Federal Aviation Administration (“FAA”)-approved jet engine and aircraft component replacement parts, other than the original equipment manufacturers (“OEMs”) and their subcontractors. HEICO also believes it is a leading manufacturer of various types of electronic equipment for the aviation, defense, space, industrial, medical, telecommunications and electronics industries.”
It operates in two reportable segments, the Flight Support Group and the Electronic Technologies Group:
- The Flight Support Group's main line of business “… uses proprietary technology to design and manufacture jet engine and aircraft component replacement parts for sale at lower prices than those manufactured by OEMs.” Other functions include repairs and maintenance, as well as products and services for aerospace, defense, industrial and commercial applications.
- The Electronic Technologies Group designs, manufactures and sells electronic, microwave and electro-optical products.
Revenues
The Flight Support Group and Electronic Technologies Group brought in 68% and 32%, respectively, of the company’s net sales in fiscal 2015. This extract from the 10-K for 2015 shows more detail on the two groups:
Competition
The company faces significant competition in each of its segments. In jet engine and aircraft components (Flight Support Group), the big competitor names include Pratt & Whitney and General Electric (GE, Financial).
For the Electronic Technologies Group, “. . . we compete in a fragmented marketplace with a number of companies, some of which are well capitalized.”
The competitors’ page at NASDAQ.com lists 13 competitors, the biggest of which are United Technologies Corporation (UTX, Financial), The Boeing Company (BA, Financial), and Textron Inc (TXT, Financial).
Moat
As noted, “The Flight Support Group uses proprietary technology to design and manufacture jet engine and aircraft component replacement parts. . . . .” Across the two segments, HEICO uses both patents and trade secret protection.
In addition, it operates in highly regulated sectors, and would-be competitors must win regulatory approval for many of the products and services HEICO provides.
Other
HEICO has two listings, which differ in only one respect:
- HEI common stock: one vote per share
- HEI.A Class A stock: 1/10th of a vote per share
As of October 31, 2015, the company had about 4,600 employees, none of whom are represented by unions.
The company is registered in the state of Florida, and based in Hollywood, Florida.
Year-end is October 31.
Laurans A. Mendelson, age 77, is Chairman of the Board, Chief Executive Officer, and a Director. Eric A. Mendelson, age 50, is Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group.
Comments: HEICO Corp. is a well established player in the aviation and aerospace industry. It faces significant competition from big players, but does have a moat through patents, trade secrets protection, and regulatory stasis.
Growth
As the following chart, from the beginning of 1990 shows, HEICO has posted strong revenue growth (blue line):
It’s also grown its Earnings Per Share (green line) and EBITDA (blue line) as well:
Averaging over the past five years, GuruFocus reports that HEICO has increased its:
- Revenue per share by 13.30% per year
- EBITDA by 16.8% per year
- Earnings per share (NRI) by 18.7% per year
The company attributes its growth (since 1990, when the current management team took over) to:
- A broadened line of product offerings
- An expanded customer base
- Increased R & D expenditures, and
- Acquisitions.
Comments: HEICO has posted strong, positive growth numbers since 1990, with an articulated strategy. Presumably, it plans to continue with this strategy in coming years, and barring significant changes in the market, will continue to enjoy strong growth.
Ownership
Five of the gurus followed by GuruFocus hold HEICO stock. Ken Fisher (Trades, Portfolio) has the largest holding, with 991,178 shares. Chuck Royce (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) are the second and third largest guru investors.
Institutional: 30.56% http://www.gurufocus.com/ownership/HEI
Insiders: 2.7%; CEO Mendelson owns 474,184, Eric Mendelson owns 294,759 shares and Victor Mendelson owns 279,176 shares. http://www.gurufocus.com/ownership/HEI
Shorts: 8.91%.
Note: HEI.A shares not included in this summary
Comments: A strong showing by insiders, including the CEO, suggests that the management team has the company’s best interests in mind. The institutional level is not high, but then this is not a big cap company.
By the Numbers
IMAGE keystatistics
Again, HEI.A is not included
Comments: HEICO is nearing a 52-week high; it has a very good ROE of 17.2%; its dividend is barely there, and did not buy back any shares (in fact, it increased its shares outstanding) last year. All in all, looks more like a growth, than value, stock.
Financial Strength
Quite a color contrast between the GuruFocus ratings for financial strength, a mediocre 6, and profitability and growth, a very good 9: http://www.gurufocus.com/stock/NYSE:HEI
IMAGE: financial
We see at a glance--all that red--the reason for the mediocre financial strength rating: debt. Looking just below the financial strength area, we see another graphic of interest, this one showing the cash to debt ratio:
IMAGE cashdebt
This chart of HEICO’s long-term debt makes it clear why the red flags popped up:
IMAGE longtermdebt
Is the debt manageable? For starters, we might look at the ROIC/WACC ratio at the bottom of the financial strength section. It reports:
- ROIC: 13.79% (Return on Invested Capital) http://www.gurufocus.com/term/ROIC/NYSE:HEI/Return%2Bon%2BInvested%2BCapital/Heico+Corp
- WACC: 6.13% (Weighted Average Cost of Capital) http://www.gurufocus.com/term/wacc/NYSE:HEI/Weighted-Average-Cost-Of-Capital-WACC/Heico-Corp
(Note here that the GuruFocus system returns two, different WACCs: 3.79% on the financial strength dashboard and 6.13% on the WACC page for HEI.)
Let’s also check out HEI’s earning power, its EBITDA (Earnings Before Interest, Taxes, Depreciation, & Amortization, on the blue line), EPS (Earnings Per Share, on the red line), and Net Income (on the green line):
IMAGE ebitda
Comments: As we saw in the Long-Term Debt chart, the company has dramatically increased its debt load in the past few years. Nevertheless, it has returns that outstrip its cost of capital, and so is making good use of that debt.
Valuation
The Discounted Cash Flow Fair Value calculator gives us a valuation that is 27% below the current price. In other words, this calculator thinks HEI is over-valued at its current price in the mid-$60s. http://www.gurufocus.com/dcf/HEI
IMAGE dcf
That’s a DCF based on earnings; the DCF based on free cash flow (FCF) comes in at $73.60, several dollars higher than the current price.
The PEG ratio gives us another perspective on valuation. It sits at 1.95, as shown in this GuruFocus highlight: http://www.gurufocus.com/term/peg/NYSE:HEI/PEG/Heico-Corp
IMAGE PEG
At 1.95, the stock would be considered at the high end of the fair-value range (1.0 to 1.99). Anything rated 2.0 or higher is considered over-valued.
The analysts followed by Yahoo! Finance have given HEI a Strong Buy rating, but not a meaningful price target ($58, which suggests bearish, rather than bullish sentiment about the stock. http://finance.yahoo.com/quote/HEI/analysts
At Reuters.com, 2 analysts give the stock a Buy recommendation, 3 offer an Out Perform, and 2 give it a Hold recommendation. There are no Sell or Under Perform recommendations. http://www.reuters.com/finance/stocks/analyst?symbol=HEI.N
And, finally, HEI enjoys a 5-Star predictability rating, which puts it in the top echelon of consistent earners. In turn, consistently growing earnings should lead to a higher share price, although such gains rare come as smoothly as the earnings. http://www.gurufocus.com/news/36158/gurufocus-research-what-worked-in-the-market-from-19982008-part-i-introduction-of-predictability-rank
Comments: The different valuations attached to HEICO give us no clear direction. We have under-valued, fair-valued, and over-valued estimates, as well as Buy recommendations from analysts. Those buys suggest the analysts see yet more share price gains.
Conclusion
Although HEICO Corporation currently has a place on the Undervalued Predictable screener, the undervalued piece of the equation appears outdated. Not only is the stock nearing its 52-week high, but the valuations we’ve examined suggest it is closer to fair-valued.
Looking at the P/E and PEG ratios, we would think the stock has reached the end of fair-valued territory and is moving into over-valued. The P/E is above 31, and the PEG is 1.95.
As noted above, this seems, in several ways, more of a growth than value stock. The dividend is negligible and the company has a history of adding, rather than buying back its own shares.
Regardless of what we call it, this is a good quality company with a good future. It has a 5-Star history of consistently growing its earnings (without buying back shares) and delivers an above average Return on Earnings.
Disclosure: I do not own stock in any of the companies listed in this article, nor do I expect to buy any in the foreseeable future.
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