HEI Stock Study (5-29-23)

I recently did a stock study on HEICO Corp. (HEI) with a closing price of $159.30. My original HEI study is here.

Value Line writes:

     > HEICO Corp. engages in the design, manufacture, and sale of aerospace,
     > defense, and electronics-related products and services. It operates in
     > two segments: The Flight Support Group (57% of 2022 sales) designs and
     > manufactures jet engine and aircraft component replacement parts. The
     > Electronic Technologies Group (43%) manufactures various electronic,
     > microwave, and electro-optical products. Sales by industry: commercial
     > aviation, 43%; defense/space, 39%; medical, electronics, and other, 18%.

This medium-size company has grown sales and EPS at annualized rates of 8.8% and 15.0%, respectively, since 2013. Lines are mostly up, straight, and parallel with a slight pullback in ’20 [and ’21 for EPS]. PTPM leads industry and peer averages while increasing from 17.9% (’13) to 22.2% (’22): good support for its Wide Economic Moat rating from M*. The last-5-year average is 20.9%.

ROE leads peers and lags the industry over the last decade in declining from 17.6% to 14.2% with a last-5-year average of 16.6%. Debt-to-Capital is lower than peer and industry averages in falling from 38.4% (’13) to 10.5% (’22) with a last-5-year average of 20.2%. Interest Coverage is 25.5 and Quick Ratio is 1.27. Value Line gives a B++ rating for Financial Strength.

I forecast long-term sales growth of 11.0% based on the following:

• CNN Business projects growth of 22.7% YOY and 16.8% per year for ’23 and ’22-’24 (based on 10 analysts).
• YF projects YOY 23.9% and 8.8% for ’23 and ’24, respectively (13 analysts).
• Zacks projects YOY 21.4% and 8.7% for ’23 and ’24, respectively (4).
• Value Line projects 12.3% annualized growth from ’22-’27.
• CFRA projects 24.0% YOY and 17.5% per year for ’23 YOY and ’22-’24, respectively.
• M* offers a 2-year ACE estimate of 16.2% per year.

I am forecasting below the long-term estimate.

I forecast long-term annualized EPS growth of 12.0% based on the following:

• CNN Business reports ACE of 16.1% YOY and 16.3% per year for ’23 and ’22-’24, respectively (based on 10 analysts), along with 5-year annualized growth of 10.0%.
• MarketWatch projects 16.5% and 15.3% per year for ’22-’24 and ’22-’25, respectively (12 analysts).
• Nasdaq.com projects 10.5% and 7.1% per year for ’23-’25 and ’23-’26 [6, 4, and 1 analyst(s) for ’23, ’25, and ’26].
• Seeking Alpha projects 4-year annualized growth of 14.4%
• YF projects YOY 16.9% and 15.8% for ’23 and ’24, respectively (13), along with 5-year annualized growth of 15.7%.
• Zacks projects YOY 15.7% and 9.8% for ’23 and ’24, respectively (4), along with 5-year annualized growth of 12.6%.
• Value Line projects annualized growth of 14.9% from ’22-’27.
• CFRA projects 18.0% YOY and 16.5% per year for ’23 and ’22-’24, respectively, along with a 3-year CAGR of 25.0%.

I am forecasting below the long-term-estimate range (mean of five: 14.7%). My initial value is ’22 EPS of $2.55/share rather than Q2 ’23 EPS of $2.73 (annualized).

My Forecast High P/E is 48. High P/E has ranged from 32.3 (’15) to 67.4 (’21) over the last 10 years with a last-5-year average of 60.5. The trend continues higher, but I don’t expect this to continue forever. The last-5-year-average average P/E is 48.3. I will use that for the high despite still being outside my comfort zone.

My Forecast Low P/E is 34. Low P/E has trended higher with a range from 19.5 (’13) to 49.8 (’22) over the last decade. The last-5-year average is 36.1. I am forecasting just under this.

My Low Stock Price Forecast (LSPF) is the default value of $86.70 (based on $2.55/share initial EPS). This is 45.6% less than the previous closing price and 18.5% less than the 2021 low. At first glance, this may seem unreasonably low. However, using a higher price means a higher Forecast Low P/E [seems completely reasonable to me as is].

Payout Ratio has ranged from 5.7% to 7.7% over the last 10 years with a last-5-year average of 6.7%. I am forecasting conservatively at 5.0%.

These inputs land HEI in the HOLD zone with an U/D ratio of 0.8. Total Annualized Return (TAR) is 6.4%.

PAR (using Forecast Average—not High—P/E) is 3.1%, which is less than the yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 116 studies over the past 90 days (39 outliers including mine excluded), averages for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 9.8%, 12.0%, 43.1, 24.9, and 6.6%, respectively. I am only lower on EPS growth and Payout Ratio. Value Line projects a future average annual P/E of 49.5, which is [dubiously] higher than MS (34.0) and mine (41.0).

MS high and low EPS are $4.53/share and $2.39/share: very close to my $4.49 and $2.55.

MS LSPF of $68.00 implies a low P/E of 28.5 (vs. the above-stated 24.9), is 21.6% less than mine, and is 14.3% greater than the $2.39 * 24.9 = $59.51 default value. This confirms a lack of appreciable MOS behind the current study. Furthermore, the stock is so far above the BUY zone that the aggressive MS LSPF does not even matter right now.

PEG is another check on value that also shows a big disconnect. My forward PEG is 41 / 12 = 3.4. A generally-accepted upper limit is 1.0 – 1.5.

I would look to revisit HEI under $119/share.