HEI Stock Study (8-29-23)

Posted by Mark on November 14, 2023 at 07:05 | Last modified: August 29, 2023 14:54

I recently did a stock study on HEICO Corp. (HEI) with a closing price of $167.85. Previous studies are here and 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%.

Over the past decade, this medium-size company has grown sales and EPS at annualized rates of 8.8% and 15.0%, respectively. 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% in ’13 to 22.2% in ’22 with a last-5-year mean of 20.9%.

Also over the past decade, ROE leads peers and lags the industry while declining from 17.6% in ’13 to 14.2% in ’22 with a last-5-year mean of 16.6%. Debt-to-Capital is less than peer and industry averages while falling from 38.4% in ’13 to 10.5% in ’22 with a last-5-year mean of 20.2%.

Interest Coverage is 25.5 and Quick Ratio is 1.3. Value Line gives a B++ rating for Financial Strength, and M* gives a “Standard” rating for Capital Allocation.

With regard to sales growth:

• CNN Business projects growth of 22.7% YOY and 18.7% per year for ’23 and ’22-’24 (based on 16 analysts).
• YF projects YOY 26.2% and 18.0% for ’23 and ’24, respectively (15 analysts).
• Zacks projects YOY 26.1% and 21.4% 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 24.5% per year.

I am forecasting below the long-term estimate at 11.0% per year.

With regard to EPS growth:

• CNN Business reports ACE of 15.3% YOY and 15.6% per year for ’23 and ’22-’24, respectively (based on 16 analysts), along with 5-year annualized growth of 15.0%.
• MarketWatch projects 15.4% and 14.8% per year for ’22-’24 and ’22-’25, respectively (16 analysts).
• Nasdaq.com projects 13.4% and 9.3% 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 14.0%.
• YF projects YOY 14.9% and 17.1% for ’23 and ’24, respectively (15), along with 5-year annualized growth of 13.0%.
• Zacks projects YOY 14.5% and 13.7% for ’23 and ’24, respectively (6), along with 5-year annualized growth of 13.0%.
• Value Line projects annualized growth of 14.9% per year 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: 14.0%) at 12.0% per year. My initial value is ’22 EPS of $2.55/share rather than 2023 Q2 EPS of $2.73 (annualized).

My Forecast High P/E is 48.0. Over the last decade, high P/E ranges from 32.3 in ’15 to 67.4 in ’21 with a last-5-year mean of 60.5. The trend is higher, but I don’t expect this to continue forever. The last-5-year-mean average P/E is 48.3. My forecast is just below the latter.

My Forecast Low P/E is 36.0. Over the past decade, low P/E trends higher with a range from 19.5 in ’13 to 49.8 in ’22 and a last-5-year mean of 36.1. My forecast is just below the latter.

My Low Stock Price Forecast (LSPF) of $91.80 is default based on $2.55/share initial value: 45.3% less than the previous closing price, 33.9% less than the 52-week low, and 13.7% less than the 2021 low. This may seem extreme. However, the Forecast Low P/E seems completely reasonable to me as is. Using my approach, it would have to be raised.

Over the past decade, Payout Ratio ranges from 5.7% to 7.7% with a last-5-year mean of 6.7%. I am forecasting conservatively at 5.0%.

These inputs land HEI in the HOLD zone with a U/D ratio of 0.6. Total Annualized Return (TAR) is 5.2%.

PAR (using Forecast Average—not High—P/E) is 2.5%, which is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on the total annualized return (TAR) of 5.2% instead, which is still lower than the risk-free rate.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 108 studies (my study and 21 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 10.0%, 12.0%, 46.2, 25.5, and 6.6%. I am only lower on Payout Ratio [very unusual for me!]. Value Line’s projected average annual P/E of 49.5 is higher than MS (35.9) and mine (42.0).

MS high / low EPS are $4.62 / $2.40 vs. my $4.49 / $2.55 (per share). These EPS ranges are practically identical.

MS LSPF of $67.10 implies a Forecast Low P/E of 30.2: higher than the above-stated 25.5. MS LSPF is 18.3% greater than the default $2.40/share * 25.5 = $61.20, which results in more aggressive zoning. MS LSPF does remain 21.1% less than mine.

My TAR (over 15.0% preferred) is greater than the 4.6% from MS. This is a first.

I would not claim any MOS backing the current study.

I track a few different valuation metrics. PEG is 4.4 and 4.6 per Zacks and my projected P/E: both significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is overvalued at 1.3. Kim Butcher’s “quick and dirty DCF” prices the stock at 40.0 * [$6.50 – ($0.36 + $0.50)] = $225.60, which would be 35.6% undervalued.

I will look to re-evaluate the stock under $122. With a forecast high price of $215.70, I estimate TAR will meet my criterion at or below $107.85/share.