HEICO is well-known for its specialized components in the civilian and defense aviation markets, where it has successfully carved out a profitable niche. This business model appears highly lucrative, with HEICO boasting a track record of around 23% compounded annual growth since 1990. Chris Mayer, the author of "100 Baggers: Stocks That Return 100-to-1 and How To Find Them," owns the stock, as does Warren Buffett. The question is, should you consider owning it too?
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of HEICO. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I don't own any stocks in HEICO's competitors either. Thus, I have no personal stake in HEICO. If you want to purchase shares or fractional shares of HEICO, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
The Business
HEICO Corporation, founded in 1957 in Florida, is an American aerospace and electronics company specializing in manufacturing advanced products for aircraft, spacecraft, defense systems, medical devices, and telecommunications. The company operates through two primary segments: the Flight Support Group and the Electronic Technologies Group. The Flight Support Group contributed 68% of net sales in fiscal 2024. This segment uses proprietary technology to develop FAA-approved replacement parts for jet engines and aircraft components, offering functionally equivalent but more cost-effective alternatives to original equipment manufacturers (OEMs). Additionally, it repairs and overhauls aviation components and manufactures niche products for commercial and military aerospace applications. The group also supports military aircraft with parts distribution and integration services for the U.S. Department of Defense and allied foreign governments. The Electronic Technologies Group, accounting for 32% of fiscal 2024 net sales, focuses on designing and producing highly specialized electronic, microwave, and electro-optical products for industries such as defense, space, telecommunications, and medical technology. Its portfolio includes advanced systems such as infrared simulation equipment, RF components, antennas, and power supplies - offering reliability and performance for critical applications. HEICO follows a dual growth strategy of organic expansion and acquisitions. Since 1990, it has completed 103 acquisitions, including its largest to date: Wencor, for $2 billion in fiscal 2023. This strategy has driven its impressive long-term performance, with sales growing at an annual rate of 16% and net income at 18% since 1990. The company’s moat lies in its ability to deliver high-quality, cost-effective replacement parts and specialized products, making it an attractive alternative to OEMs. Its decentralized structure allows business units to operate independently under their own leadership while benefiting from centralized sales forces, fostering efficiency and innovation. HEICO also maintains strong customer relationships through regulatory compliance and a proven track record of delivering reliable cost savings, solidifying its leadership in the aerospace and electronics markets.
Management
Laurans A. Mendelson has served as the CEO of HEICO since February 1990, when he, along with his sons, acquired the company for $25 million. He has also held the position of Chairman of the Board since December 1990. A Certified Public Accountant by training, Laurans A. Mendelson brings over three decades of visionary leadership and extensive expertise in the aerospace and electronic technologies industries. Under his strategic guidance, HEICO has undergone a remarkable transformation into a global leader. His focus on strategic investments and acquisitions has been instrumental in driving the company’s substantial growth. Since 1990, HEICO has delivered an extraordinary total return of approximately 47.500%, a testament to Laurans A. Mendelson's ability to identify and capitalize on growth opportunities at the right time. Laurans A. Mendelson and his family are significant shareholders in HEICO, underscoring their alignment with the company’s long-term success. He has fostered a customer-centric approach, famously emphasizing, "We don’t try to screw the customer." This guiding principle is evident in HEICO’s pricing strategy, which keeps prices between one-third and one-half lower than those of OEMs. This commitment has solidified strong, lasting customer relationships while maintaining competitive pricing. Respected for his long-term vision, Laurans A. Mendelson has shaped a corporate culture that prioritizes sustainable growth over short-term gains. HEICO’s leadership team places a strong emphasis on annual growth rates rather than focusing on quarterly metrics, recognizing that organic growth in the aerospace industry can fluctuate due to timing or external factors. This strategic focus has helped HEICO maintain a steady trajectory of growth and success. Endorsements from individuals like Chris Mayer further underscore the strength of HEICO’s management, particularly its emphasis on generating free cash flow - a key pillar of the company’s success. Laurans A. Mendelson’s leadership continues to position HEICO as a market leader, driven by sustainable value creation and innovation. I am confident that his leadership will guide HEICO toward continued success in the years to come.
The Numbers
The first metric to investigate is the return on invested capital (ROIC). Ideally, I would like to see a 10-year history with a minimum annual ROIC of 10%. HEICO has consistently delivered a strong ROIC above 10% over the past decade, with the exception of the past two fiscal years. This recent decline is primarily due to the acquisition of Wencor, HEICO's largest acquisition to date. Despite this, it is encouraging that HEICO has maintained a solid ROIC with minimal volatility over the past decade, which highlights the strength of its business model. It is particularly impressive that ROIC did not drop below 10% even during the pandemic, a period that posed significant challenges for the aerospace industry. Management has emphasized their focus on growth and operational efficiencies, which should help increase ROIC in the coming years. Given these efforts and the company’s strong track record, I am confident that ROIC will soon exceed 10% again.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most significant of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. HEICO is a textbook example of how a company's financials should look. The numbers have been consistently increasing every year over the past decade, a feat that only a select few companies have achieved. What is particularly noteworthy is that HEICO has managed to grow its equity by more than 10% year over year every single year for the past decade - a truly impressive accomplishment.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that HEICO has consistently delivered positive free cash flow every year for the past decade. Over this period, there have been only two years where free cash flow decreased compared to the prior year, one of which was fiscal year 2023, impacted by the acquisition of Wencor. Encouragingly, HEICO achieved its highest free cash flow ever in fiscal year 2024. However, the levered free cash flow margin is currently below its ten-year average and, excluding fiscal year 2023, is at its lowest level since 2015. Despite this, management’s optimistic outlook for future periods highlights confidence in driving improvement through operational efficiencies, cost management, and ongoing revenue growth. This provides reason to believe that the levered free cash flow margin will soon return to historical levels. Additionally, the free cash flow yield is below its ten-year average and has been at its lowest point over the past three years, which suggests that the shares are trading at a premium valuation. However, this is a point we will revisit later in the analysis.
Debt
Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a three-year period. This is calculated by dividing the total long-term debt by earnings. After analyzing HEICO’s financials, I found that the company has 4,33 years of earnings in debt. While this is higher than I would prefer, the elevated debt is primarily due to the acquisition of Wencor. Typically, HEICO has maintained less than three years of earnings in debt, and management has already taken steps to prioritize debt repayment over the past year, successfully reducing the level of debt. Given the clear explanation for the temporary increase and management's demonstrated focus on reducing it, I am not overly concerned about the current debt level.
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Risks
Competition poses a significant risk to HEICO due to the complex and highly competitive nature of its operating environments. Both the Flight Support Group and the Electronic Technologies Group face challenges from established and emerging competitors, each leveraging unique strengths and capabilities. In the Flight Support Group, HEICO primarily competes with original equipment manufacturers (OEMs) in the jet engine and aircraft component replacement parts market. OEMs hold significant advantages, including strong brand recognition, extensive product portfolios, and substantial financial, marketing, and technical resources. These advantages allow OEMs to respond quickly to customer demands and bundle products and services, creating additional competitive pressure on independent providers like HEICO. Furthermore, major commercial airlines with in-house maintenance and overhaul units, as well as independent service companies, present additional competition in repair, overhaul, and distribution services. The Electronic Technologies Group operates in a fragmented and competitive marketplace, contending with both well-capitalized industry leaders and smaller, more agile competitors. This segment faces intense pressure in the design and manufacture of electronic, data, microwave, and electro-optical equipment, where innovation, quality, and service are critical differentiators. The need to continuously develop cutting-edge technologies while maintaining high product quality adds to the challenges in this highly specialized market.
Macroeconomic conditions represent a significant risk to HEICO due to its heavy reliance on the aviation industry, which is highly sensitive to global economic cycles and industry-specific disruptions. The aviation sector is directly impacted by broader economic trends, and downturns - such as recessions - often lead to reduced orders, delayed payments, supply chain disruptions, and financial strain on HEICO's customers and suppliers. These factors can negatively affect demand for HEICO’s products and services, resulting in lower revenues and profitability. The cyclical nature of the aviation industry adds another layer of vulnerability, as historical downturns have led to reduced demand for jet engine and aircraft component replacement parts, as well as repair and overhaul services. External factors, such as changes in airline fleet strategies, profitability, and purchasing behaviors, can also significantly influence HEICO’s business performance. Global factors, including trade policies, geopolitical tensions, terrorism, and disease outbreaks, further exacerbate uncertainty for HEICO. For example, public health crises like the COVID-19 pandemic showcased how rapidly air travel demand can collapse, severely affecting HEICO’s sales. These risks highlight the company’s dependence on stable economic and industry conditions. The combination of these challenges underscores the material threat that macroeconomic instability poses to HEICO’s financial results and overall business performance.
Regulations pose a substantial risk to HEICO due to the highly regulated nature of its industry and the significant consequences of non-compliance. The manufacturing, repair, and overhaul of aircraft parts and accessories are subject to stringent oversight by government agencies, including the Federal Aviation Administration (FAA) in the United States, as well as equivalent regulatory bodies worldwide. HEICO must ensure that all its products meet rigorous airworthiness standards and that its repair and overhaul operations maintain compliance with FAA certifications. Non-compliance with these standards could lead to the suspension or revocation of critical authorizations and approvals, severely impacting HEICO’s operations and financial performance. Additionally, the introduction of new or more stringent regulations could impose greater compliance costs and operational restrictions on the company. For example, HEICO’s international sales are subject to U.S. government export approvals and licensing requirements. A denial of export licenses for certain products within the Electronic Technologies Group or Flight Support Group could significantly limit HEICO’s ability to access international markets, reducing its revenue and growth prospects.
Reasons to invest
HEICO’s proven track record and disciplined approach to acquisitions make it a compelling investment opportunity. For over three decades, acquisitions have been a cornerstone of HEICO’s growth strategy, complementing organic expansion and enabling the company to penetrate niche segments in aviation, defense, space, medical, telecommunications, and electronics. Since 1990, HEICO has completed 103 acquisitions, consistently targeting businesses with strong cash flow, earnings potential, and long-term growth prospects - all while maintaining a focus on fair valuations. The recent acquisition of Wencor, HEICO’s largest to date, has exceeded expectations, showcasing the company’s ability to execute and integrate large-scale transactions effectively. This acquisition has expanded HEICO’s aftermarket aerospace product offerings and unlocked significant growth opportunities for both HEICO’s legacy businesses and Wencor’s operations. The company’s ability to quickly generate cash flow from acquisitions, including Wencor, highlights its efficient integration process and the accretive nature of these transactions. HEICO’s appetite for future acquisitions remains strong, supported by an active and well-developed pipeline across its business segments. The company’s disciplined approach ensures that only acquisitions aligned with its focus on profitability and cash generation are pursued. This strategy, combined with HEICO’s exceptional execution capabilities, positions the company to capitalize on growth opportunities through both small and large acquisitions.
Expanding its presence in key markets, particularly in defense and space, is a compelling reason to invest in HEICO. These sectors are critical to the company's long-term growth strategy, offering significant opportunities driven by rising demand for cost-effective, innovative, and high-quality solutions. HEICO’s reputation as a trusted partner in these markets, combined with its commitment to delivering best-cost products, positions the company to capitalize on these opportunities effectively. HEICO’s Flight Support Group has experienced growing defense sales, which currently account for about a quarter of its revenue. The company is well-positioned to further expand its footprint in this segment by offering significantly lower-cost alternatives to OEM parts. This value proposition is particularly relevant as the U.S. government and Department of Defense increasingly prioritize budget efficiency. Management has highlighted opportunities to supply parts that meet the same stringent standards as those used in commercial aviation for defense applications. This strategy addresses outdated procurement practices, tapping into what HEICO describes as "low-hanging fruit" within defense spending. Additionally, the company benefits from growth opportunities tied to missile defense systems, a rapidly expanding market fueled by heightened geopolitical tensions and global demand for enhanced defense capabilities. HEICO provides components for these systems, and its sales in this area are growing significantly, supported by a robust multi-year backlog of missile defense orders. This backlog represents meaningful growth potential for the company in the medium to long term.
The commercial aftermarket is a compelling reason to invest in HEICO, driven by the industry's reliance on aging aircraft fleets and the company's ability to provide cost-effective, high-quality replacement parts. Currently, there are over 30.000 commercial aircraft in operation globally, with more than 10,000 exceeding 20 years of age. Older aircraft demand significantly more maintenance, with annual costs increasing as they age, creating a long-term tailwind for HEICO as airlines depend on aftermarket parts to keep their fleets operational. HEICO's management has emphasized that airlines are increasingly cautious about maintaining operations amid supply chain constraints from OEMs, which often result in part shortages and deferred deliveries. This environment has driven airlines to prioritize reliable, cost-effective aftermarket solutions. HEICO’s strong delivery program and ability to supply parts promptly - often within the same month of an order - have made it a trusted partner for airlines, reducing the need for them to overstock inventory. HEICO’s extensive portfolio of FAA-approved parts, which are functionally equivalent to OEM components but offered at a lower cost, provides a significant competitive advantage. Management has noted a record number of new Parts Manufacturer Approvals, further expanding HEICO's product offerings and strengthening its position in the aftermarket. Additionally, HEICO’s ability to help airlines transition from legacy solutions to newer, more efficient products creates additional growth opportunities. Airlines are increasingly recognizing the value of these solutions, particularly in managing the rising maintenance costs associated with aging fleets.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 3,67, which is from the fiscal year 2024. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 18,5%, but 15% is the highest number I use. Additionally, I have selected a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on HEICO's historically higher price-to-earnings (P/E) ratio. Our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $110,10. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy HEICO at a price of $55,05 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 615, and capital expenditures were 57. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a general guideline, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 40 in our calculations. The tax provision was 119. We have 138,8 outstanding shares. Hence, the calculation will be as follows: (615 – 40 + 119) / 138,8 x 10 = $50,00 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With HEICO's free cash flow per share at $4,43 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $69,93.
Conclusion
I find HEICO to be an intriguing company, particularly due to its exceptional management, led by a CEO with a strong track record and significant ownership stake. HEICO has historically achieved a ROIC above 10%, though the past two years were impacted by the Wencor acquisition. The company just delivered its highest free cash flow ever, though the levered free cash flow margin remains below the ten-year average. Competition is a risk for HEICO, as it faces pressure from OEMs with greater resources and bundling capabilities, airlines with in-house maintenance, independent service companies, and fragmented competitors in its Electronic Technologies Group, where success depends on innovation, quality, and service. Macroeconomic conditions also pose risks, as HEICO’s reliance on the aviation industry makes it vulnerable to downturns, supply chain disruptions, and external events like recessions, trade policies, and health crises. Stringent regulations further increase risk, as non-compliance with industry standards could disrupt operations and financial performance. HEICO’s disciplined approach to acquisitions is a key strength, with 103 acquisitions since 1990, including the successful integration of Wencor, driving immediate and long-term growth. Expanding in key markets like defense and space offers further growth potential, while sustained demand in the commercial aftermarket from aging global aircraft fleets provides a durable revenue stream. I believe HEICO is a great company, but valuation is crucial. Buying shares at the intrinsic value of the Ten Cap price of $100 would represent a solid long-term investment opportunity.
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