HEI Stock Study (5-28-24)

Posted by Mark on June 29, 2024 at 07:13 | Last modified: May 28, 2024 12:53

I recently did a stock study on HEICO Corp. (HEI) with a closing price of $217.31. Previous studies are here, here, and here.

M* writes:

     > Heico is an aerospace and defense supplier that focuses on creating niche
     > replacement parts for commercial aircraft and components for defense
     > products. In commercial aerospace, Heico is the largest independent
     > producer of replacement aircraft parts, primarily for engines. In the
     > defense market, the company produces niche subcomponents used in
     > targeting technology as well as simulation equipment, among other things.
     > It operates as two segments: the flight support group, or FSG, and the
     > electronic technologies group, or ETG, both of which supply the aerospace
     > and defense sectors to different degrees. The company is highly
     > acquisitive, focusing on companies in similar or adjacent markets that
     > are generating strong cash flow with the potential for growth.

Over the last 10 years, this medium-size company has grown sales and EPS at annualized rates of 9.6% and 13.6%, respectively. Lines are mostly up, straight, and parallel with a slight dip in ’20 [and ’21 for EPS].

Over the last decade, PTPM leads industry and peer averages by ranging from 17.5% in ’14 to 22.2% in ’22 with a last-5-year mean of 20.7%. ROE leads peers and lags the industry while declining from 17.8% (’14) to 13.8% (’23) with a last-5-year mean of 15.5%. Debt-to-Capital is less than peer and industry averages while ranging from 10.0% in ’21 to 44.3% in ’23 with a last-5-year mean of 23.5%.

Quick Ratio is 1.3 and Interest Coverage is 6.4. Value Line gives an “A” rating for Financial Strength, and M* gives a “Standard” rating for Capital Allocation.

With regard to sales growth:

• YF projects YOY 31.1% and 7.7% for ’24 and ’25, respectively (based on 17 analysts).
• Zacks projects YOY 30.1% and 7.3% for ’24 and ’25, respectively (7 analysts).
• Value Line projects 15.1% annualized growth from ’23-’28.
• CFRA projects 29.7% YOY and 18.5% per year for ’24 and ’23-’25, respectively.
• M* offers a 2-year ACE estimate of 20.7% per year and projects 20.0% per year through ’28 in its analyst note.

I am forecasting below the range at 14.0% per year.

With regard to EPS growth:

• MarketWatch projects 20.6% and 18.5% per year for ’23-’25 and ’23-’26, respectively (based on 20 analysts).
• Nasdaq.com projects 18.6% YOY and 13.6% per year for ’25 and ’24-’26 [9, 8, and 4 analyst(s) for ’24, ’25, and ’26].
• Seeking Alpha projects 4-year annualized growth of 17.7%.
• YF projects YOY 21.0% and 19.0% for ’24 and ’25, respectively (17), along with 5-year annualized growth of 17.9%.
• Zacks projects YOY 14.4% and 18.5% for ’24 and ’25, respectively (8), along with 5-year annualized growth of 19.1%.
• Value Line projects annualized growth of 17.4% from ’23-’28.
• CFRA projects 20.3% YOY and 20.0% per year for ’24 and ’23-’25, respectively, along with a 3-year CAGR of 27.0%.
• M* projects long-term annualized growth of 16.8%.

My 15.0% forecast is less than the long-term-estimate range (mean of five: 17.8%). Initial value is ’23 EPS of $2.91/share rather than 2024 Q1 EPS of $3.06 (annualized).

My Forecast High P/E is 45.0. 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 63.1. The trend is higher, but I don’t expect this to continue forever. The last-5-year-mean average P/E is 51.7. My forecast is below the latter.

My Forecast Low P/E is 35.0. Over the past decade, low P/E trends higher with a range from 19.8 in ’17 to 50.8 in ’23 and a last-5-year mean of 40.3. My forecast is below the latter.

My Low Stock Price Forecast (LSPF) of $153.60 is the 52-week low: 29.3% lower than previous close. The default based on initial value given above seems unreasonably low at $101.90 (53.1% lower than previous close).

Over the past decade, Payout Ratio (PR) 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 0.7. Total Annualized Return (TAR) is 4.0%.

PAR (using Forecast Average—not High—P/E) is less than the current yield on T-bills at 1.6%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR albeit still lower than the risk-free rate.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 38 studies done in the past 90 days (my study and 8 other outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 14.0%, 15.0%, 56.3, 40.3, and 6.8%, respectively. I am equal to or lower across the board. Value Line projects a future average annual P/E of 40.0 that is less than MS (48.3) and equal to mine.

MS high / low EPS are $6.15 / $2.97 versus my $5.85 / $2.91 (per share). Value Line’s high EPS of $6.50 is greater than both.

MS LSPF of $128.80 implies a Forecast Low P/E of 43.4 versus the above-stated 40.3. MS LSPF is 7.6% greater than the default $2.97/share * 40.3 = $119.69, which results in more aggressive zoning. MS LSPF is 16.2% less than mine, however.

TAR (over 15.0% preferred) is much less than MS 11.2%. I believe MOS to be robust in the current study.

With regard to valuation, PEG is 3.3 and 4.1 per Zacks and my projected P/E: significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is also expensive at 1.4.

Up 23.1% over the past year, the stock continues to be on a roll and is nowhere close to the BUY zone. Shareholders are likely quite happy with this 1-in-5 stock that wildly defies its fundamentals. While I can’t recommend an entry here, it’s tough to recommend a sale because of the historical stock appreciation and persistently high analyst growth estimates.

HEI is a BUY under $181/share. With a forecast high price ~$263, the BI TAR criterion would not be met until ~$132.