HEICO: Why I Am Downgrading It After Explosive Stock Price Rise

seekingalpha09-03

HEICO's Q3 earnings showed strong growth, with revenues up 37% and EPS beating estimates, driven by the Wencor acquisition and organic growth.The company's strong end-market demand and successful M&A ...

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Monty Rakusen HEICO   reported third quarter earnings on the 26th of August. While the revenues showed significant year-on-year growth, the company missed analyst estimates by $1.73 million, while EPS of $0.97 beat the estimates by $0.05. With the most recent earnings in, I will be discussing the stock price development, the earnings, provide a risk assessment and update my price target and rating for HEICO Corp. How Has HEICO Stock Performed?Article Date Performance Market performance   HEICO Stock Tumbles: Buy The Dip?8/29/2023 +55% +25.6%   HE","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"LU1169589451.USD":"ALLSPRING (LUX)  U.S. SELECT EQUITY \"A\" (USD) ACC","BK4588":"碎股","LU2326559502.SGD":"Natixis Loomis Sayles US Growth Equity P/A SGD-H","BK4516":"特朗普概念","HEI.A":"海科航空","BK4564":"太空概念","BK4187":"航天航空与国防","LU1435385759.SGD":"Natixis Loomis Sayles US Growth Equity RA SGD-H","BK4551":"寇图资本持仓","LU1429558221.USD":"Natixis Loomis Sayles US Growth Equity RA USD","BK4585":"ETF&股票定投概念","LU1169590202.USD":"ALLSPRING (LUX)  U.S. SELECT EQUITY \"I\" (USD) ACC","HEI":"海科航空"},"translate_title":"HEICO：为什么我在股价爆炸性上涨后下调其评级","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"HEI":1,"HEI.A":1},"content_text":"HEICO's Q3 earnings showed strong growth, with revenues up 37% and EPS beating estimates, driven by the Wencor acquisition and organic growth.The company's strong end-market demand and successful M&A strategy have led to significant sales and margin improvements across its business segments.Despite impressive performance, HEICO's current valuation is high, offering limited upside against FY25 and FY26 earnings, prompting a downgrade to hold.   Monty Rakusen HEICO (NYSE:HEI) (NYSE:HEI.A) reported third quarter earnings on the 26th of August. While the revenues showed significant year-on-year growth, the company missed analyst estimates by $1.73 million, while EPS of $0.97 beat the estimates by $0.05. With the most recent earnings in, I will be discussing the stock price development, the earnings, provide a risk assessment and update my price target and rating for HEICO Corp. How Has HEICO Stock Performed?   Article Date Performance Market performance   HEICO Stock Tumbles: Buy The Dip? 8/29/2023 +55% +25.6%   HEICO: Insanely Overpriced Or Extremely Underappreciated? 11/26/2023 +48% +24%   HEICO Stock: A Long-Term Aerospace And Defense Value Powerhouse To Buy 5/6/2024 +20.5% +9.8%   Click to enlarge I have covered HEICO three times and what we see is that the share price performance has been extremely strong, with easy market outperformance. I believe that is driven by strong end-market demand as well as a very successful M&A track record. This gives the company a strong combination of organic as well as inorganic growth, with significant opportunities for better cost absorption. HEICO Earnings Firing On All Cylinders HEICO Third quarter sales grew 37%, which was driven by the acquisition of Wencor, which provides a favorable comp. However, organic sales growth was 7%, which also put on display a favorable demand backdrop for the business. Flight Support Group sales increased 68.28% or 15% organically to $681.6 million while Electronic Technologies saw sales being more or less table year-on-year reflecting lower medical product sales. By end-market, aerospace sales grew 55% while Defense and Space revenues grew 28.6% and sales in other segments nearly 6%. Income for the Flight Services Group increased 72% reflecting sales growth in combination with gross margin growth. Electronic Technologies Group margins improved from 22.8% to 23.5%. Overall gross margins for HEICO improved from 38.6% to 39.2% while SGA as a percentage of revenue decreased from 17.9% to 17.4%. SGA did grow year-on-year by roughly a third. This was driven by acquisitions that also drove intangible asset amortization and other factors that drove the costs higher are just the supporting costs for net sales growth. Operating income increased 45% to $216.5 million, with margins improving from 20.7% to 21.8%. So, the third quarter results did show the sales add from the Wencor acquisition, but it also put on display organic growth which demonstrates strong end-market demand. Furthermore, we saw gross margins and operating margins trend nicely. To me, those all show that HEICO is really performing well, both in the operating space as well as the mergers and acquisitions space, as it is successfully integrating companies. What Are The Risks And Opportunities For HEICO? I don’t see a lot of risks in connection to HEICO. The company enjoys strong end-market demand and has been adding product portfolios such as the Boeing 737NG and Boeing 777 displays, as well as companies such as Wencor. The only risk would be softening demand, but there are no signs of weakening demand. What investors should keep in mind is that a significant portion of the growth has been driven by the acquisition of Wencor which was completed in Q3 2023. So, going forward the comp will be a bit more challenging, and the growth rates of sales are likely to come down. For the fourth quarter, analysts still expect 10% sales growth, which also provides some indication that strong market demand is expected to continue. What is perhaps a bit unfortunate is that HEICO does not provide any guidance. Downgrading HEICO Stock To Hold The Aerospace Forum To determine multi-year price targets The Aerospace Forum has developed a stock screener which uses a combination of analyst consensus on EBITDA, cash flows and the most recent balance sheet data. Each quarter, we revisit those assumptions and the stock price targets accordingly. In a separate blog I have detailed our analysis methodology. For the years ahead, the EBITDA and free cash flow estimates have increased by 3% and 4%. That, however, is not enough to maintain a buy rating on the name. While I definitely do like HEICO as an investment, the reality is that it currently trades well ahead of its median EV/EBITDA and provides little upside against FY25 earnings and 13% upside against FY26 earnings. However, rather than using the median valuation, that price target is driven by the current EV/EBITDA of the company and that multiple significantly higher than that of peers and is also elevated compared to the company’s own median EV/EBITDA multiple. Given the strong M&A track record and low leverage, there is a possible justification for those higher EV/EBITDA multiples, but even when we take that into account, the upside is too limited to for a buy rating. As a result, I am downgrading the stock to hold with a $290 longer-term price target. Conclusion: HEICO Stock Is Phenomenal But Expensive  Overall, I do like HEICO stock and the third quarter results were impressive with a combination of inorganic and organic growth as well as gross and operating margin expansion. Those are all things that I would like to see. However, from a valuation point of view, the stock has run significantly ahead of its median valuation and while I believe those elevated multiples could stick I believe that at current prices the stock would be fairly valued with FY25 earnings in mind. As a result, I am downgrading HEICO stock to hold.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2464879976"}