Company Reports

Heico's fiscal 2024 first-quarter operating margins came in lower than we anticipated but, having reviewed our long-term forecasts and incorporated management's discussion of how their businesses are faring so far this year, we have not changed our $171 per share fair value estimate for the narrow-moat specialty aerospace parts maker.

Heico reported fiscal fourth-quarter and full year 2023 earnings that outpaced our expectations on the whole, and we've raised our fair value estimate to $171 per share from $162.

Heico exploits the switching costs created by aerospace original equipment manufacturers for their spare parts. OEMs typically build the hefty research and development costs of developing their products and certifying their design for airworthiness into the prices they charge for servicing and/or replacing them in the aftermarket. Heico reverse-engineers these complex parts at a fraction of the original development cost, gains regulatory approval to sell its functionally equivalent parts, and sells them for around 30%-40% less than the original. Known in the United States as parts manufacture authority, or PMA, under the FAA's jurisdiction, regulatory approval is critical as most buyers can only buy OEM or PMA certified parts to retain the airworthiness certification of their aircraft. Most operators of newer aircraft stick with OEM parts because of long-term service contracts with engine OEMs or lease terms aimed at preserving the resale value of the aircraft, generally limiting Heico to supply parts for aircraft and systems in later stages of their service life.

Heico reported its fiscal third-quarter earnings broadly consistent with our forecast, and our fair value estimate remains $162 per share.

Heico exploits the switching costs created by aerospace manufacturers for their spare parts. Aerospace suppliers typically build the hefty research and development costs of developing their products into the prices they charge for servicing and/or replacing that part in the aftermarket. Heico reverse-engineers these complex parts at a fraction of the cost of their original development, gains critical regulatory approval to sell its functionally equivalent parts, and sells them around 30%-40% cheaper than the original. Known in the United States as parts manufacture authority under the FAA's jurisdiction, regulatory approval is critical as most buyers can only buy OEM or PMA certified parts to retain the airworthiness certification of their aircraft. Most operators of newer aircraft stick with OEM parts for a number of reasons (such as long-term service contracts with engine manufacturers or lease terms aimed at preserving the resale value of the aircraft), limiting Heico to make parts for aircraft and systems in later stages of their service life.

We are initiating coverage of Heico with a fair value estimate of $162 per share, which represents 40 times fiscal 2024 earnings and an enterprise value that is 26 times our forecast 2024 EBITDA. While these multiples are higher than other industrial companies, we are forecasting Heico's ample opportunity for accretive acquired growth in a fragmented industry.

We are dropping coverage of Heico. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Narrow-moat-rated Heico posted record operating income as increased global flight activity drove demand for aircraft maintenance, repair, and overhaul. Sales of $539 million and earnings per share of $0.62 beat FactSet consensus by 1.4% and 1.1%, respectively. After adjusting our model for fiscal second-quarter earnings, we are increasing our fair value estimate for Heico to $97 per share from $96.

Heico breaks the rules that define most aerospace and defense suppliers. Typically, commercial aerospace suppliers face significant research and development costs and capitalize the costs over a decadeslong monopoly over the product and its aftermarket. In Heico’s commercial aerospace exposure, it reverse-engineers complex spare parts at a fraction of the cost of product development, gains regulatory approval to sell replacement parts, and then sells the part at a discount to the original equipment manufacturers’ spares. The business model works on two critical assumptions: no new entrants and rational competition with OEMs. New entrants are limited by stiff regulatory hurdles and the difficulty of reverse-engineering commercial aerospace products. The company has largely avoided irrational competition with OEMs by limiting market share on any part to about 30% with just a few customers.

Narrow-moat-rated Heico reported solid revenue growth in its aerospace businesses and a slight omicron-variant-related slowdown in defense sales during the fiscal first quarter. We are increasing our fair value estimate to $96 per share from $93 due to increased near-term revenue growth assumptions and the time value of money. We see shares as overvalued at current prices.

Heico breaks the rules that define most aerospace and defense suppliers. Typically, commercial aerospace suppliers face significant research and development costs and capitalize the costs over a decadeslong monopoly over the product and its aftermarket. In Heico’s commercial aerospace exposure, it reverse-engineers complex spare parts at a fraction of the cost of product development, gains regulatory approval to sell replacement parts, and then sells the part at a discount to the original equipment manufacturers’ spares. The business model works on two critical assumptions: no new entrants and rational competition with OEMs. New entrants are limited by stiff regulatory hurdles and the difficulty of reverse-engineering commercial aerospace products. The company has largely avoided irrational competition with OEMs by limiting market share on any part to about 30% with just a few customers.

Narrow-moat rated Heico reported solid fiscal fourth-quarter earnings as the aerospace recovery continues to benefit suppliers. Sales of $509 million and earnings per share of $0.62 beat FactSet consensus by 1.2% and 5.8%, respectively. We are increasing our fair value estimate by 6.9% to $93 per share as we increase our revenue assumptions due to management commentary on a strong acquisition pipeline for 2022 and due to the time value of money. We continue to see shares as expensive.

Heico breaks the rules that define most aerospace and defense suppliers. Typically, commercial aerospace suppliers face massive research and development costs and capitalize the costs over a decadeslong monopoly over the product and its aftermarket. In Heico’s commercial aerospace exposure, it reverse-engineers complex spare parts at a fraction of the cost of product development, gains regulatory approval to sell replacement parts, and then sells the part at a discount to the original equipment manufacturers’ spares. The business model works on two critical assumptions: no new entrants and rational competition with OEMs. New entrants are limited by stiff regulatory hurdles and the difficulty of reverse-engineering commercial aerospace products. The company has largely avoided irrational competition with OEMs by limiting market share on any part to about 30% with just a few customers.

Narrow-moat-rated Heico posted solid third-quarter results. Although the delta variant of COVID-19 has not materially reduced sales, it has limited flight activity increases. Sales of $472 million missed FactSet consensus estimates by 3.1%, but earnings per share of $0.56 beat FactSet consensus by 2.2%. We’re decreasing our fair value estimate to $87 per share from $91 as we incorporate Morningstar’s expectation of higher corporate taxes into our model. We continue to think the shares are pricey.

Heico breaks the rules that define most aerospace and defense suppliers. Typically, commercial aerospace suppliers face massive research and development costs and capitalize the costs over a decadeslong monopoly over the product and its aftermarket. In Heico’s commercial aerospace exposure, it reverse-engineers complex spare parts at a fraction of the cost of product development, gains regulatory approval to sell replacement parts, and then sells the part at a discount to the original equipment manufacturers’ spares. The business model works on two critical assumptions: no new entrants and rational competition with OEMs. New entrants are limited by stiff regulatory hurdles and the difficulty of reverse-engineering commercial aerospace products. The company has largely avoided irrational competition with OEMs by limiting market share on any part to about 30% with just a few customers.

Narrow-moat-rated Heico reported substantial improvement during its fiscal second quarter as the commercial aviation recovery began taking root with leisure travel in the U.S. and Asia this quarter. Despite top line and operating income improvement, Heico posted sequentially flat net earnings of $0.51 per share, due to abnormally low taxes in the prior quarter resulting from stock option exercises. We are increasing our fair value estimate for the firm to $91 per share from $90, but we still see the stock as substantially overvalued.

Heico breaks the rules that define most aerospace and defense suppliers. Typically, commercial aerospace suppliers face massive research and development costs and capitalize the costs over a decadeslong monopoly over the product and its aftermarket. In Heico’s commercial aerospace exposure, it reverse-engineers complex spare parts at a fraction of the cost of product development, gains regulatory approval to sell replacement parts, and then sells the part at a discount to the original equipment manufacturers’ spares. The business model works on two critical assumptions: no new entrants and rational competition with OEMs. New entrants are limited by stiff regulatory hurdles and the difficulty of reverse-engineering commercial aerospace products. The company has largely avoided irrational competition with OEMs by limiting market share on any part to about 30% with just a few customers.

Narrow-moat rated Heico reported a solid first fiscal quarter of 2021. The year-over-year declines in the company’s flight support group as the pandemic continues to depress overall air traffic were partially offset by solid growth in the company’s electronic technologies group. Heico’s earnings per share of $0.51 beat FactSet consensus by 6.1% and the company posted a revenue decline of about 17.5% that was reasonably consistent with consensus estimates. We’re maintaining our $90 fair value estimate as we have marginally increased our near-term profitability assumptions and decreased our revenue assumptions.

Heico breaks the rules that define most aerospace and defense suppliers. Typically, commercial aerospace companies face massive research and development costs and capitalize the costs over a decadeslong monopoly over the product and its aftermarket. In Heico’s commercial aerospace exposure, it reverse-engineers complex spare parts at a fraction of the cost of product development, gains regulatory approval to sell replacement parts, and then sells the part at a discount to the original equipment manufacturers’ spares. The business model works on two critical assumptions: no new entrants and rational competition with OEMs. New entrants are limited by stiff regulatory hurdles and the difficulty of reverse-engineering commercial aerospace products. The company has largely avoided irrational competition with OEMs by limiting market share on any part to about 30% with just a few customers.

Heico breaks the rules that define most aerospace and defense suppliers. Typically, commercial aerospace companies face massive research and development costs and capitalize the costs over a decadeslong monopoly over the product and its aftermarket. In Heico’s commercial aerospace exposure, it reverse-engineers complex spare parts at a fraction of the cost of product development, gains regulatory approval to sell replacement parts, and then sells the part at a discount to the original equipment manufacturers’ spares. The business model works on two critical assumptions: no new entrants and rational competition with OEMs. New entrants are limited by stiff regulatory hurdles and the difficulty of reverse-engineering commercial aerospace products. The company has largely avoided irrational competition with OEMs by limiting market share on any part to about 30% with just a few customers.