Seeking Alpha

HEICO Has A Extremely High 4-Year Total Return But Is Overpriced

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About: HEICO Corporation (HEI), Includes: BA, DHR, EOS, HD, JNJ, OHI
by: William Stamm
William Stamm
Long only, dividend growth investing, growth at reasonable price, Total Return
Summary

HEICO's total return overperformed the Dow average for my 49-month test period by 287.83%, which is fantastic but has been flat for the last six months.

HEICO's three-year forward CAGR of 15% is great and will give you steady growth with the increasing worldwide economy and airplane budgets.

HEICO's dividend yield is well below average at 0.2% and has increased for 18 years in a row, but the yield is so low, who cares.

HEICO (HEI) is a manufacturer of Federal Aviation Administration (FAA)-approved jet engine, and aircraft component replacement parts for government markets is a buy for the total return growth investor. HEICO has steady growth and has plenty of cash, which it uses to expand its product line and buy bolt-on companies. The company is being reviewed using The Good Business Portfolio guidelines, my IRA portfolio of good business companies that are balanced among all styles of investing.

I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am reviewing. For a complete set of guidelines, please see my article "The Good Business Portfolio: Update to Guidelines, August 2018". These guidelines provide me with a balanced portfolio of income, defensive, total return, and growing companies that hopefully keeps me ahead of the Dow average.

When I scanned the five-year chart, HEICO has a great chart going up and to the right for 2016 through 2020 YTD. The latest flat-six months create a buying opportunity for this solid total return investment, but the stock price is still well over the target price.

ChartData by YCharts

HEICO is reviewed in the following topics below.

  • Investment Fundamentals
  • Company Business
  • Conclusions
  • Portfolio Management Highlights

Investment Fundamentals

I use total return as my starting point in looking at a company's business. The total return must be greater than the Dow's total return over my test period. HEICO beats against the Dow baseline in my 49-month test compared to the Dow average. I chose the 49-month test period (starting January 1, 2016, and ending to date) because it includes the great year of 2017 and 2019, and other years that had a fair or bad performance. The great HEICO total return of 350% compared to the Dow base of 62.17% makes HEICO a great investment for the total return investor. Looking back five years, $10,000 invested five years ago would now be worth over $41,900 today. This gain makes HEICO's a great investment for the total return investor looking back, which has future growth as the United States and the worldwide aerospace sector continues to grow.

Dow's 49-Month total return baseline is 62.17%

Company name

49-Month total return

The difference from Dow baseline

Yearly dividend percentage

HEICO

350.0%

287.83%

0.2%

HEICO does not meet my dividend guideline of having dividends increase for 8 of the last ten years and having a minimum of 1% yield. HEICO has a below-average dividend yield of 0.2% and has had increases for 19 years, making HEICO a poor choice for the dividend income investor. The dividend was last increased in December 2019 for an increase from $0.07/half to $0.08/half or a 14% increase. The five-year average payout ratio is low, at 6%. After paying the dividend, this leaves plenty of cash remaining for increasing the business of the company by expanding its product line and increasing foreign sales, which raise the earnings and value to the shareholder.

I only like large-capitalization companies and want the capitalization to be at least greater than $10 billion. HEICO easily passes my rule. HEICO is a large-cap company with a capitalization of $15.1 billion. HEICO's 2020 projected operating cash flow at $450 million is great, allowing the company to have the means for company growth. Large-cap companies like HEICO have the cash and ability to buy other smaller companies and weather any storms that might come along.

HEICO's S&P CFRA rating is two stars or sell with a recently increased target price to $110. HEICO's price is above the target by 16%. HEICO is above the target price at present and has a high forward PE of 46, making HEICO a wait and see at this entry point for the total return investor. I rate HEICO a nibble (start a small buy) for future growth if you are a long-term investor, all others wait for a better price.

I look for the earnings of my positions too consistently beat their quarterly estimates. For the last quarter on December 16, 2019, HEICO reported earnings that beat expected at $0.62 by $0.04, compared to last year at $0.49. Total revenue was higher at $541 million more than a year ago by 14.56% year over year and beat expected total revenue by $12 million. This was a great report with a bottom-line beating expected, and the top line increasing and a bottom-line increase compared to last year. The next earnings report will be out late February 2020 and is expected to be $0.74 compared to last year at $0.58 a good increase. The graphic below shows the strong earnings growth over the last 29 years.

Source: Earnings presentation slides

One of my guidelines is would I buy the whole company if I could. The answer is yes. The total return is unbelievable. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business, and also generates a fair income stream. Most of all, what makes HEI interesting is the long-term growth of the world economy, giving you an increasing growth in the aerospace sector.

Company Business

HEICO is the largest provider of aero-space replacement parts in the United States and foreign countries.

As per data from Reuters:

HEICO Corporation is a manufacturer of Federal Aviation Administration (FAA)-approved jet engine and aircraft, other than the original equipment manufacturers (OEMs) and their subcontractors. The Company operates through two segments: Flight Support Group (FSG) and Electronic Technologies Group (ETG). The Flight Support Group designs and manufactures jet engine and aircraft component replacement parts. In addition, the Flight Support Group repairs, overhauls, and distributes jet engine and aircraft components, avionics and instruments for domestic and foreign commercial air carriers and aircraft repair companies, as well as military and business aircraft operators, and manufactures thermal insulation products. The Electronic Technologies Group designs and produces mission-critical subcomponents for various markets, which are utilized in larger systems, including targeting, tracking, identification, simulation, testing, communications, lighting, surgical, medical imaging, baggage scanning, telecom, and computer systems.

Overall, HEICO is a good business with 15% CAGR projected growth as the United States and foreign economies grow going forward, with the increasing demand for HEI's aero-space replacement parts.

The paraphrase below from the 4th quarters earns call. The cash flow provided by operating activities increased 33% to a record of $437.4 million in fiscal '19, and that was up from $328.5 million in fiscal '18. Cash flow provided by operating activities increased 9% to $124 million in the fourth quarter of fiscal '19, and that was up from $113.7 million in the fourth quarter of fiscal '18. They continue to generate significant cash flow for the shareholders by remaining focused on developing niche products and our strategic commitment to a highly decentralized and efficient entrepreneurial structure. The Board of Directors declared a $0.08 per share regular semiannual cash dividend. The cash dividend represents a 14% increase over the prior semiannual per share amount of $0.07. HEICO's consistent growth strategies and their desire to continue rewarding shareholders while at the same time, retaining sufficient capital to fund internal growth is the engine that drives HEI's growth. In October '19, our Dukane Seacom subsidiary received FAA TSO certifications for their special underwater locator beacon and low lithium battery, and we're pleased to achieve these certifications. This particular product, which we call DK290, builds on Seacom's product legacy and simplify shipping and handling processes with the lower lithium content.

This shows the feelings of top management for the continued growth of the HEICO business and share-holder return by reinvesting the strong cash flow back into the company. HEI has good growth and will continue as the world's aero-space budgets grow with the world economy. The graphic below shows guidance for 2020.

Source: Earnings presentation slides

Conclusions

HEICO is a great choice for the total return investor as the projected growth of the worldwide airline budgets increase. HEICO will be considered for The Good Business Portfolio when the overvaluation gets to a more reasonable number. The portfolio already has Boeing (BA) in the airline and aerospace business, and HEI does not have a good balance between growth and income. If you want a steady growing total return and don't need immediate income, HEI may be the right investment for you in the aero-apace business.

Portfolio Management Highlights

The five companies comprising the largest percentage of the portfolio are Johnson & Johnson (JNJ) at 8.1% of the portfolio, the Eaton Vance Enhanced Equity Income Fund II (EOS) at 8.2% of the portfolio, Home Depot (HD) at 9.1% of the portfolio, Omega Health Investors (OHI) at 9.2% of the portfolio, and Boeing at 11.3% of the portfolio. Therefore, BA, EOS, JNJ, OHI, and HD are now in trim or close to trim position, but I am letting them run a bit since they are great companies.

  • On February 4, I trimmed HD to 9% of the portfolio. HD is a great business but needs more foreign expansion to grow even stronger.
  • On January 13, I trimmed DHR to 1.5% of the portfolio. I like DHR long term, but the next year's earnings look a bit weak, and I need cash for my RMD.
  • On December 5, I wrote covered calls against my Danaher (DHR) position to collect another premium ($1.54/share December $150). I like DHR, but it's getting a bit pricey, and the covered calls give me some extra income and some downside protection. On December 19, I closed the position by buying back the calls and made a small profit.

Boeing is going to be pressed to 15% of the portfolio because of it being cash positive on 787 deferred plane costs at $1.3 billion in the third quarter of 2019, an increase from the second quarter. Boeing has dropped in the last nine months because of the second 737 Max crash, and I look at this as an opportunity to buy BA at a reasonable price. From the latest news on Boeing is a rumor that Warren Buffett is taking a position on BA, maybe he knows a good investment. It now looks like the 737 Max will not be approved until mid-year, but the FAA has said it could be earlier because Boeing is making good progress, all will depend on the first test flight with the FAA.

JNJ will be pressed to 9% of the portfolio because of its defensive nature in this post-BREXIT world. Earnings in the last quarter beat on the top and bottom line, and Mr. Market did nothing. JNJ in April 2019 increased the dividend to $0.95/Qtr., which is 57 years in a row of increases. JNJ is not a trading stock but a hold forever; it is now a strong buy as the healthcare sector remains under pressure.

The total return for the Good Business Portfolio is ahead of the Dow average from 1/1/2020 to date by 1.67%, which is a nice gain above the market for the portfolio with BA a strong drag. Each quarter after the earnings season, I write an article giving a complete portfolio list and performance, the latest article is titled "The Good Business Portfolio: 2019 3rd Quarter Earnings and Performance Review". Become a real-time follower, and you will get each quarter's performance after the next earnings season is over in a few weeks.

Disclosure: I am/we are long BA, JNJ, HD, EOS, DHR, MO, DIS, V, OHI, ADP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions of the companies are my own.