Heico (HEI) Pre-Earnings Analysis: What Investors Should Know Before Buying

HEICO Corporation (HEI), an aerospace and defense components provider, is scheduled to release its financial results for the fourth quarter on December 18, 2023, after the NYSE closing. Analysts expect the company’s revenue for the quarter (ended October 31, 2023) to increase 47.5% year-over-year to $899.05 million.

However, the company’s fourth-quarter EPS is expected to decline 3.1% year-over-year to $0.68. Despite that, HEI topped the consensus revenue estimates in all four trailing quarters and the consensus EPS estimates in three of the trailing four quarters, which is impressive.

For the third quarter of 2023, HEICO posted net sales of $722.90 million, beating analysts’ estimate of $709.33 million. This is compared to $569.53 million in the same period of 2022. The company reported record quarterly net sales at both the Flight Support Group (FSG) and the Electronic Technologies Group (ETG).

Solid growth of 27% in the company’s net sales was primarily from continued strong demand for its commercial aerospace products and services and the contributions from its fiscal 2023 and 2022 acquisitions. HEI’s net income per share came in at $0.74, compared to the consensus estimate of $0.66 and up 23.3% year-over-year.

During the last reported quarter, cash flow provided by operating activities was $145.90 million, which reflects an increase in working capital principally driven by a rise in inventories to support its increased consolidated backlog. The company forecasts continued solid cash flow from operations for the fiscal year 2023.

“As we look ahead to the remainder of fiscal 2023, we continue to anticipate net sales growth in both the FSG and ETG, principally driven by demand for the majority of our products,” said Laurans A. Mendelson, HEI’s Chairman and CEO. “We remain committed to developing new products and services and further market penetration, while maintaining our financial strength and flexibility.”

Shares of HEI have gained 5.8% over the past month and 9.4% over the past six months to close the last trading session at $181.85. Also, the stock has surged 19.6% year-to-date.

Let’s look at factors that could influence HEI’s performance in the upcoming months:

Positive Recent Developments

On August 24, HEI announced that two of its subsidiaries, 3D PLUS and Exxelia, supplied mission-critical electronic components to India’s Chanfrayaan-3 spacecraft, which successfully executed a soft landing on the Moon’s South Pole.

“We are honored to have been a part of the supplier base for this remarkable spacecraft and to have been part of this historic mission. Our ability to supply these products reflects the unique and talented Team Members we are fortunate to lead at our companies, along with the high-quality components our companies have developed over time,” Pierre Maurice, 3D PLUS’ Co-Founder and CEO, with Paul Maisonnier, Exxelia’s CEO jointly commented.

On August 4, HEI completed the acquisition of Wencor Group, a large commercial and military aircraft aftermarket company. Wencor will join HEICO’s Flight Support Group, and the combination will be transformative, offering a unique and growing portfolio of proprietary cost-saving solutions for its airline and OEM customers.

The company expects this highly synergistic acquisition to be accretive to its earnings within the year after the closing. Further, HEI anticipates it will continue to achieve its growth objectives in the upcoming years. Following the acquisition’s completion, HEICO forecasts its net debt-to-EBITDA leverage ratio to be below 3:1 and return to its historical levels within nearly a year to eighteen months.

Solid Financials

For the third quarter that ended July 31, 2023, HEI’s net sales increased 26.9% quarter-over-quarter to $722.90 million. Net sales from its Flight Support Group grew 22.6% year-over-year, while its Electronic Technologies Group was 33.4%. Its operating income rose 16% from the year-ago value to $149.37 million.

In addition, the company’s EBITDA came in at $179.80 million, up 17.7% from the prior year’s quarter. Net income attributable to HEICO rose 23.6% year-over-year to $102.02 million. Also, net income per share attributable to HEICO shareholders was $0.74, an increase of 23.3% year-over-year.

As of July 31, 2023, HEI’s cash and cash equivalents stood at $694.26 million, compared to $139.50 million as of October 31, 2022. The company’s current assets totaled $1.93 billion, compared to $1.15 billion as of October 31, 2022.

Analyst Expectations

Analysts expect HEI’s revenue and EPS for the fiscal year (ended October 2023) to increase 33% and 11.2% year-over-year to $2.94 billion and $2.84, respectively. Further, the company’s revenue and EPS for the fiscal year 2024 are expected to grow 28.8% and 22.5% year-over-year to $3.78 billion and $3.47, respectively.

Increased Debt

On July 27, HEI closed an offering of $600 million in aggregate principal amount of 5.250% senior notes due August 1, 2028, and $600 million in aggregate principal amount of 5.350% senior notes due August 1, 2033.

As of July 31, 2023, the company’s total liabilities were $2.15 billion versus $1.12 billion as of October 31, 2022. Total debt to net income attributable to HEICO trailing-12-month ratio was 3.06x as of July 31, 2023, compared to 0.83x as of October 31, 2022. Its net debt to EBITDA ratio came in at 0.75x and 0.25x as of July 31, 2023, and October 31, 2022, respectively.

Robust Profitability

HEI’s trailing-12-month gross profit margin of 38.97% is 28.7% higher than the 30.28% industry average. Likewise, the stock’s trailing-12-month EBITDA margin of 26.06% is 90.9% higher than the industry average of 13.66%. Also, its trailing-12-month net income margin of 15.04% is 147.1% higher than the 6.09% industry average.

Moreover, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 14.81%, 9.54%, and 7.29% favorably compared to the industry averages of 12.23%, 7.09%, and 4.99%, respectively. Its trailing-12-month levered FCF margin of 10.04% is 65.5% higher than the 6.07% industry average.

Elevated Valuation

In terms of forward non-GAAP P/E, HEI is currently trading at 63.82x, 239.6% higher than the industry average of 18.79x. Also, the stock’s forward EV/Sales and EV/EBITDA of 7.78x and 31.21x are significantly higher than the industry averages of 1.79x and 11.49x, respectively.

Additionally, the stock’s forward Price/Sales multiple of 8.56 is 512.7% higher than the industry average of 1.40. Its forward Price/Book and Price/Cash Flow of 7.57x and 65.71x are considerably higher than the respective industry averages of 2.69x and 14.05x, respectively.

POWR Ratings Reflect Uncertainty

HEI’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. The stock has an A grade for Quality, consistent with its higher profitability relative to its peers.

In addition, HEI has a C grade for Stability, justified by its 60-month beta of 1.16. The stock also has a C grade for Sentiment, in sync with mixed analyst estimates for the about-to-be-reported quarter.

However, HEI has a D grade for Valuation, justified by its higher-than-industry valuation.

Within the Air/Defense Services industry, HEI is ranked #33 out of 71 stocks.

Beyond what I have stated above, we have also given HEI grades for Growth and Momentum. Get all HEI’ POWR Ratings here.

Bottom Line  

HEI reported a beat on top and bottom lines in the third quarter of fiscal 2023. The company posted record net sales, driven by continued solid demand for its commercial aerospace products and services and significant contributions from its fiscal 2023 and 2022 acquisitions.

For the remainder of 2023, the company expects net sales growth in both the FSG and ETG, thanks to demand for most of its products. However, analysts expect HEICO’s EPS to decline in the fourth quarter of fiscal 2023. Continued inflationary pressures and lingering supply chain disruptions may lead to higher material and labor costs.

Given its stretched valuation, increased liabilities, and uncertain near-term outlook, it could be wise to hold HEI and wait for a better entry point in the stock.

Stocks to Consider Instead of HEICO Corporation (HEI)

Given its uncertain short-term prospects, the odds of HEI outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) stocks from the Air/Defense Services industry instead:

Woodward, Inc. (WWD)

Cadre Holdings, Inc. (CDRE)

Willis Lease Finance Corporation (WLFC)

To explore more A and B-rated defense stocks, click here.

What To Do Next?

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HEI shares were unchanged in premarket trading Monday. Year-to-date, HEI has gained 18.51%, versus a 24.09% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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