HEICO stock: positive growth, but limited upside (NYSE:HEI)
HEICO Company (NYSE: HEI) was founded in 1957 under its original name Heinicke Instruments. Over time, it has grown into a multi-billion dollar aerospace and defense manufacturing company with a wide range of products and interests. Focusing on niche markets, the company has developed many profitable parts used in a wide variety of industries, from aircraft, medical, space and telecommunications equipment manufacturers. They also deal in commercial and military aviation parts. Based in Hollywood, Florida, HEICO has two main branches, the Flight Support Group – responsible for supplying FAA-approved aircraft spare parts, and the Electronic Technologies Group – responsible for manufacturing specific parts to meet niche technology needs. A third group of the company focuses on selling these parts to various other manufacturing companies in a B2B model.
In this article, I will show that despite market stability and a profitable history, HEICO is not worth an investment at this immediate time. COVID has changed the way the world works; more people are working and meeting remotely, which will cause travel rates to stagnate. With the uncertainty surrounding new variants coupled with rapid inflation, the immediate future of the market is very uncertain. HEICO is diversified enough to mitigate these covid-related losses, and they are making a steady profit. However, with the current price level so close to their 52-week high and no exciting growth on the horizon, the status quo is not attractive enough to warrant an investment. For this reason, investors should refrain from making any decision in this case.
Miscellaneous Offers Prop HEICO Up
One of the most attractive aspects of HEICO on paper is its history of maintaining a fairly stable market value, even in times of instability. This is probably due to the great diversity from which they generate income. The company has three main branches, each dealing with a particular market need. While mass production of common parts is a relatively common revenue generator, HEICO focuses more on niche markets, offering innovative products used in the manufacture of devices requiring sensitive electronics or aerospace capabilities.
According to their website, HEICO’s Flight Support Group is “the world’s largest independent supplier of FAA-approved aircraft spare parts.” But the company doesn’t just sell parts, it also manufactures, designs, installs, replaces and repairs several critical systems in aircraft. They are associated with all the major names in the airline industry and offer a multitude of services. One of their most important partnerships is with aircraft manufacturing giant Boeing (NYSE: BA), with around 60% of the branch’s profits being made through this partnership. Additionally, this branch has secured many major military aviation contracts, increasing its overall customer base and maintaining a stable revenue stream. The company’s Electronics Technology Group segment is a maintainer in the aerospace industry. He is responsible for the manufacturing and testing of critical sub-components used in sensitive and specialized electronic equipment.
The last branch deals with partnerships and specific fabrications. HEICO develops the manufacture of a specific part or component that corresponds to the assembly of a specific company. Their versatility, stable customer base, ability to serve niche markets and lucrative partnerships rank them among the leading aerospace manufacturing companies in the market.
There’s nothing particularly shocking about HEICO’s earnings. Over the past five years, they have seen revenue increases in 4 of them, with the only year down being the pandemic in 2020. In 2020, their revenue fell from just over $2 billion in 2019 to just under $1.8 billion in 2020. last year in 2021, HEICO got back on track posting revenues of nearly $1.9 billion, returning to their top of 2019.
Net income, however, has been a point of setback over the past three years. While the pandemic can be blamed for the loss in 2020, the 2021 report showed a decrease from the previous year. In 2019, HEICO recorded a net income of $327,896,000. In 2020, that number has dropped to $313,984,000. 2021 followed with a three-year low in net income, posting a total of $304,220,000. This equates to a 7.2% decline in net income from 2019 to present. Net income is an important factor that affects the share price and is probably one of the factors limiting growth despite the increase in income. This could be linked to several factors, including supply chain disruption and an increase in operating expenses, reported in 2021 at $334,523,000, the highest mark since 2019, when operating expenses were to a record high of $356,743,000.
In terms of the balance of the company, everything seems to be evolving positively, or at least remaining in the status quo. The company is incredibly stable, holding $937,385,000 in current assets, down slightly from 2019’s mark of just over $1 billion, but up from 2017 and 2018. respectively. HEICO has almost no debt for a multi-billion dollar company, with its long-term debt for 2021 standing at just $234,983,000. That number is down significantly from 2020, when the company had long-term debt of $738,786,000. HEICO has repaid 68% of its long-term debt between 2020 and 2021, which will help increase its future profitability. This likely contributed to a strong 2021 EBITDA release of +$486.78 million.
HEICO also holds an impressive capital surplus of $1.9 billion. This is a big plus for the company as it represents another form of cash remaining after dividends are paid to shareholders. This cash again represents stability and is a positive asset for a business. There is nothing dangerous about finances that worries HEICO; Unfortunately, despite all of its strong financials, increased revenue, and positive balance sheet, that doesn’t seem to reflect much on the stock price. HEICO stock price currently stands at $139.70. That’s down from its January high of $149.63. Prior to January 2022, HEICO’s 5-year high was $144.67 in 2019. There is not much risk in an investment, but as current prices are close to the 52-week high forecast currently , there’s not much room to win either.
There is no doubt that HEICO is a powerful company with strong leadership and a long profitable history. The aerospace and defense market is expected to see growth, and after a pandemic hit 2020, the business appears to be back on a positive trend. The advantage of stable companies is that they present little or no investment risk. On the other hand, they offer little opportunity for growth or upside. HEICO is diversified enough to mitigate losses that may be related to another covid shutdown, and they are making a steady profit.
However, with their stock prices so close to their 52-week high and no real exciting growth on the horizon, the status quo is not attractive enough to warrant an investment. For this reason, investors should sit on the sidelines and wait for a correction that might make establishing a position more attractive.