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I last reviewed HEICO (HEI and HEI-a) in this May 30, 2025 post. At the time it had just released Q2 and YTD2025 results. With the release of Q3 and YTD2025 results following the August 25 market close, I revisit this existing holding to gauge HEI's valuation.
There is no denying that HEI has richly rewarded long-term shareholders. I only initiated a position in September 2019. Investors who initiated a position decades ago and never 'played around' with their shares, however, have made out like bandits!
Following my initial purchase, I have periodically increased my exposure to the point where it was my 5th largest holding when I completed my 2025 Mid-Year Portfolio Review.
My total HEI-a exposure consists of 900 shares in a 'Core' account and 400 shares in a 'Side' account in the FFJ Portfolio. In addition, a couple of young investors I am helping on their journey to financial freedom have HEI-a exposure. I, however, exclude their holdings when determining my exposure.
IMPORTANT:
- HEICO Corporation has two classes of common stock (HEI and HEI-a). Both classes of shares are virtually identical in all economic respects except voting rights. The difference is that each HEI share is entitled to one vote per share while each HEI-a share is entitled to a 1/10 vote per share. This post focuses on the HEI-a shares since these are the shares I own.
- Do not confuse HEICO Corporation with privately owned The Heico Companies.
Business Overview
HEI's website that includes a section with links to the websites of many subsidiaries enables us to learn about their respective operations.
The 2024 Annual Report/Form 10-K is a must read if there is any thought of investing in the company.
HEI's Disciplined Acquisition Strategy
Acquisitions are an important element of HEI's growth strategy. The following is extracted from HEI's FY2024 Form 10-K.
Acquisitions have been an important element of our growth strategy over the past thirty-four years, supplementing our organic growth. Since 1990, we have completed approximately 103 acquisitions complementing the niche segments of the aviation, defense, space, medical, telecommunications and electronics industries in which we operate. We typically target acquisition opportunities that allow us to broaden our product offerings, services and technologies while expanding our customer base and geographic presence. Even though we have historically pursued an active acquisition policy, our disciplined acquisition strategy involves limiting acquisition candidates to businesses that we believe will continue to grow, offer strong cash flow and earnings potential, and are available at fair prices.
The About Us and Press Releases sections of the company's website provide information on several of HEIs' acquisitions over the years.
HEI makes conservative use of debt and uses its strong cash flow to reduce debt taken on for acquisition purposes. Management regularly articulates that its synergistic acquisitions are structured to be accretive to earnings within the year following closing.
Gables Engineering Acquisition
In the past 3 quarters, HEI has completed ~$0.63B of acquisitions. On July 24, 2025, HEI announced that its Electronic Technologies Group had acquired Gables Engineering, Inc. for cash at closing. This was HEI's 3rd largest acquisition in its history and the 5th acquisition completed in FY2025.
Gables designs and manufactures advanced solutions for aerospace platforms including cockpit displays and other avionics components such as navigation, audio, surveillance, and communication panels for a wide range of aircraft.
This acquisition should be accretive to HEI's earnings within the year following its purchase.
Financials
Q3 and YTD2025 Results
HEI's most recently released financial results are accessible in the Form 8-K released on August 25 that is accessible through the SEC Filings section of the company's website. The Q3 2025 Form 10-Q should be released within days.
The following are HEI's non-GAAP Financial Measures extracted from the August 25 and May 27 earnings releases for ease of comparison.
Conventional And Modified Free Cash Flow (FCF) Calculations (FY2016 - FY2024 and YTD2025)
FCF is a non-GAAP measure, and therefore, its computation is open to debate. Most companies subtract capital expenditures (CAPEX) from Net Cash Provided by Operating Activities found in the Consolidated Statement of Cash Flows.
In several posts, I touch upon why investors should deduct share based compensation (SBC) when analyzing a company's FCF.
Unlike many technology companies that issue a 'boatload' of shares annually as part of its various SBC programs, HEI's use of SBC is conservative. As a result, the FCF calculated using the conventional and modified methods does not result in a material variance.
In the Valuation section of my previous post I deducted ~$8.5 million of Employer contributions to HEICO Savings and Investment Plan to calculate HEI's FCF. Upon further reflection, this amount should not be deducted in computing FCF. The amount in question is relatively insignificant so there is no material impact on my analysis.
FY2026 Outlook
HEI does not provide net sales and earnings guidance. Management continually states, however, that the company will continue to invest in research and development and execute its successful acquisition program.
Risk Assessment
HEI's domestic senior unsecured long-term debt ratings are:
- Moody's: Baa2 with a positive outlook (last reviewed on May 6, 2025)
- Fitch: upgraded from BBB to BBB+ with a stable outlook on June 18, 2025
The rating assigned by Moody's is the middle tier of the lower medium-grade investment-grade category. The rating assigned by Fitch is the top tier of the lower medium-grade investment-grade category.
Both ratings define HEI as having an adequate capacity to meet its financial commitments. Adverse economic conditions or changing circumstances, however, are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.
*S&P Global does not rate HEI's debt.*
Dividend and Dividend Yield
Warren Buffett and Charlie Munger (now deceased) use one key test to determine whether it makes sense for a company to distribute a dividend or not. The test is whether a company can continue to create more than $1 of value for every dollar retained. In essence, a company should probably not distribute a dividend (or distribute a very small dividend) when it has the opportunity to reinvest retained earnings profitably.
HEI's exemplary track record demonstrates that reinvesting in the business is the most optimal means of allocating capital.
The company's dividend history is accessible here. Don't even bother with HEI's dividend metrics. The vast majority of any potential return will likely continue to be in the form of capital appreciation.
HEI has had six 5 for 4 stock splits over the years; twelve stock splits are reflected but investors must remember that HEI has 2 classes of common stock.
HEI issues shares as part of its employee compensation structure. It also periodically issues HEI-a shares to the sellers of some of the companies it acquires thus permitting the sellers to participate in HEI's wealth creation model. This explains the growth in the diluted weighted average number of outstanding shares in FY2016 - FY2024 and YTD2025 reflected in the table provided earlier.
Looking at HEI's Condensed Consolidated Statements of Cash Flows over the past several years, we see that share repurchases are negligible. They are generally for the redemption of common stock related to stock option exercises.
Valuation
I only own 1300 shares and the young investors I am helping on their journey to financial freedom only hold a few hundred shares. Casting our shareholder votes, therefore, is irrelevant when it comes to influencing the company's decisions. I have, therefore, decided to hold HEI-a shares since the valuation is typically superior to that for HEI shares.
For example, using the current brokers' adjusted diluted earnings estimates (that are likely to change over the coming days), we get the following valuations.
HEI-a shares @ ~$260.78
- FY2025 - 20 brokers - ~56.6 using a mean of $4.61 and low/high of $4.45 - $4.76.
- FY2026 - 19 brokers - ~ 50 using a mean of $5.22 and low/high of $5.00 - $5.80.
- FY2027 - 13 brokers - ~ 44.1 using a mean of $5.91 and low/high of $5.45 - $6.99.
HEI-a shares @ ~$330
- FY2025 - 20 brokers - ~71.6 using a mean of $4.61 and low/high of $4.45 - $4.76.
- FY2026 - 19 brokers - ~ 63.2 using a mean of $5.22 and low/high of $5.00 - $5.80.
- FY2027 - 13 brokers - ~ 55.8 using a mean of $5.91 and low/high of $5.45 - $6.99.
In the first 3 quarters of FY2025, HEI generated $3.57 of diluted EPS. If it generates similar diluted EPS in Q4 as in the prior 3 quarters of the current fiscal year (~$1.19 per quarter), we should expect FY2025 diluted EPS of ~$4.76. Using the current shares prices reflected above, the forward diluted PE for the HEI-a shares and HEI shares should be ~54.8 ($260.78/~$4.76) and ~69.3 ($330/~$4.76).
This is is not an exact science because recent quarterly results do not reflect any contribution to the bottom line from HEI's recent acquisitions. Furthermore, HEI's share count continues to gradually increase.
Capital intensive companies often incur CAPEX levels that are comparable to their depreciation and amortization. HEI's annual CAPEX, however, is typically less than its annual depreciation and amortization. In FY2019 - FY2024 and YTD2025, HEI's annual CAPEX was (in millions of $) $29, $23, $36, $32, $49, $58, and $46. Its annual depreciation and amortization, however, was $84, $89, $93, $96, $130, $175, and $145. HEI can, therefore, allocate its capital toward acquisitions versus 'maintenance' CAPEX.
In my opinion, it is preferable to gauge HEI's valuation using FCF.
In recent years, HEI's FCF/share calculated using the conventional or modified methods has typically been greater than diluted EPS with the exception of 2023. We can, therefore, expect HEI's valuation calculated using FCF/share to be superior to its valuation calculated using diluted earnings.
I may have been too conservative when I attempted to value HEI in my prior review by:
- underestimating the FY2025 FCF; and
- overestimating the FY2025 weighted average diluted shares outstanding.
I estimated HEI would generate ~$0.71B of FCF in FY2025. We now know that it generated ~$0.585B in the first 9 months of the current fiscal year, and therefore, HEI could generate ~$0.78B of FCF for the year ($0.585B + (33.3% of ~$0.585B)).
The diluted weighted average number of common shares outstanding (in millions) in FY2022 - FY2024 was 138.037, 138.905, and 140.198. At the end of Q2 and Q3 2025, the weighted average was 140.541 and 140.950. I previously estimated the FY2025 diluted weighted average number of common shares outstanding would likely increase to ~141.800. It is likely the weighted average will be closer to ~141.400.
Divide ~$0.78B of FY2025 FCF by ~141.4 million shares and we get FCF/share of ~$5.52. Using the current ~$260.78 and ~$330 share price for HEI-a and HEI shares, the forward P/FCF for HEI shares is ~47.2 and ~60 for HEI-a shares.
Final Thoughts
Investors generally view the company's long term outlook as being attractive. Furthermore, the company's risk profile is improving (see Risk Assessment section of this post).
In FY2016, HEI generated $1.376B in annual revenue. In the first 9 months of FY2025, it generated $3.276B and FY2025 annual revenue will likely be ~$4.35B. Through organic growth and disciplined growth through acquisition, HEI's annual revenue could very well reach ~$7.5B in 10 years. Furthermore, OCF and FCF should be considerably greater than current levels.
As much as I like the company's long-term prospects, I think we are experiencing a period of irrational exuberance. For example, HEI's and HEI-a's share price has surged ~$21 and ~$18 the day following the release of Q3 2025 results. The company, however, is no different today than it was the previous day.
As noted in prior posts, HEI's 52 Week Price Range can be significant. The current price range for the HEI-a shares is $174.82 - $264.71 and $216.68 - $338.92 for the HEI shares.
The risk of slightly overpaying for a high-quality company is far less than the hazard of investing in a low-quality company. At some point, however, it is prudent to question at what level does it become too risky to acquire shares in high quality companies.
I intend to increase my HEI-a exposure but will patiently wait on the sidelines in the hope that HEI's valuation improves.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long HEI-a.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
