Contents
I last reviewed HEICO (HEI-a) in this February 27, 2025 post but disclosed the additional purchase of HEI-a shares for a young investor in this brief April 7, 2025 post. Subsequent to the April 7 purchase of additional shares @ $190.3351/share, the share price has surged to ~$300 and ~$237.50 for the HEI and HEI-a shares at the May 29 market close.
With the release of Q2 2025 results following the May 27 market close, I revisit this existing holding to gauge HEI's valuation.
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.
Naturally, HEI's 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.
Management stated the following on its Q2 2026 earnings call:
We aim to accelerate growth for our recently completed acquisitions while positioning ourselves to capitalize on future acquisition opportunities.
Our disciplined financial strategy continues to focus on maximizing long-term shareholder value through a balanced approach of strategic acquisitions and organic growth initiatives aimed at gaining market share while maintaining a strong financial position and preserving flexibility.
As part of this strategy, acquisition opportunities within both segments continue to be highly active, supported by a strong pipeline of potential targets. And we're committed to pursuing complementary acquisitions that align strategically and financially with our objectives. Guided by our disciplined approach, we prioritize transactions that are financially prudent, accretive to earnings and enhance long-term value for HEICO and for our shareholders.
HEI completed its 4th acquisition of FY2025 in Q2. In April, HEI's Electronic Technologies Group acquired 100% of Rosen Aviation LLC, a designer and manufacturer of in-flight entertainment products, principally in cabin displays and control panels, for the business and aviation markets. The purchase price was paid in cash, using cash provided by operating activities. The expectation is for this acquisition to be accretive to earnings within the first year following the acquisition.
Financials
Q2 and YTD2026 Results
HEI's most recently released financial results are accessible in the Form 8-K released on May 27 and Form 10-Q released on May 29 which are accessible through the SEC Filings section of the company's website.
Consolidated operating income and net sales in Q2 2025 were record results, increasing by 19% and 15% respectively, compared to Q2 2024.
The Flight Support Group set all-time quarterly operating income and net sales records in Q2, improving 24% and 19% respectively, compared to Q2 2024. The increases reflect 14% organic growth from increased demand across all product lines and the impact from FY2024 and FY2025 acquisitions.
The Electronic Technologies Group's Q2 2025 results reflect an improved demand for the majority of its products, including double-digit organic net sales growth of space and aerospace products.
Consolidated net income increased ~27% to ~$156.8 million or $1.12 per diluted share in Q2 2025 representing an increase from ~$123.1 million or $0.88 per diluted share in Q2 2024.
I provide HEI's non-GAAP Financial Measures extracted from the May 27 earnings release for ease of reference.
Conventional And Modified Free Cash Flow (FCF) Calculations (FY2016 - FY2024)
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.
HEI's SBC in the first half of FY2025 is only $10.671 million. The company, however, has made $8.5 million in YTD employer contributions to HEICO Savings and Investment Plan. These amounts are insignificant relative to the company's YTD revenue, earnings, and cash flow.
FY2026 Outlook
HEI typically 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: BBB with a stable outlook (last reviewed on September 4, 2024)
Both ratings are in the middle tier of the lower medium-grade investment-grade category. These 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 issues HEI-a shares to the sellers of many 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 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 as opposed to share repurchases on the open market.
Valuation
Capital intensive companies often incur CAPEX levels that are comparable to their depreciation and amortization.
For example, look at Union Pacific's (UNP) Consolidated Statement of Cash Flows in their FY2022 - FY2024 Form 10-K that are accessible through the SEC Filings section of their website. In each of these 3 years, annual capital investments are ~$3.5B while depreciation and amortization are ~$2.35B. We readily see that it takes a considerable amount of money annually for UNP just to maintain its operations.
HEI is a much different story. Because it does not need to incur significant CAPEX just to maintain its operations, it can allocate its capital differently than UNP.
HEI's depreciation and amortization in FY2022 - FY2024 and the first half of FY2025 are ~$0.096B, ~$0.130B, ~$0.175B, and ~$0.095B. CAPEX during the same periods, however, are ~$0.032B, ~$0.049B, ~$0.058B, and ~$0.033B. Looking at these results, we see that the ongoing CAPEX is much lower than the combination of depreciation and amortization that is deducted on the Income Statement to determine Net Earnings.
I, therefore, prefer to gauge HEI's valuation using FCF versus earnings.
HEI's and HEI-a's share prices have surged to ~$300 and ~$237.50 by the May 29 market close.
I calculate HEI's YTD FCF as follows:
- Net cash provided by operating activities: ~$407.7 million
- Less Share-based compensation expense: ~$10.671 million
- Less Employer contributions to HEICO Savings and Investment Plan: ~$8.5 million
- Less CAPEX: $33.299 million
- YTD2025 FCF: ~$355.23 million
If HEI generates a similar amount of FCF over the second half of FY2025, FY2025 FCF could be ~$710 million.
The diluted weighted average number of common shares outstanding (in millions) in FY2022 - FY2024 and YTD2025 was 138,037, 138,905, 140,198, and 140,541 million. It seems realistic to expect the FY2025 diluted weighted average number of common shares outstanding to likely increase to ~141,800 million.
Divide ~$710 million of FY2025 FCF by ~141.8 million shares and we get FCF/share of ~$5. Using the current ~$300 and ~$237.50 share price for HEI and HEI-a shares, the forward P/FCF for HEI shares is ~60 and ~47.5 for HEI-a shares.
In my February 27, 2025 post, I wrote:
Following the release of Q1 2025 earnings, HEI's and HEI-a's respective share price has surged to ~$257.50 and ~$209, respectively.
In Q1 2025, HEI reported:
- Net cash provided by operating activities: ~$203 million
- Less Share-based compensation expense: ~$4.671 million
- Less Employer contributions to HEICO Savings and Investment Plan: ~$5.473 million
- Less CAPEX: $17.335 million
- Q1 2025 FCF: ~$175.521 million
If HEI generates a similar amount of FCF over each of the next 3 quarters in FY2025, we can anticipate FY2025 FCF to be ~$702 million.
The diluted weighted average number of common shares outstanding (in millions) in FY2022 - FY2024 and Q1 2025 was 138,037, 138,905, 140,198, and 140,484 million. It seems realistic to expect the FY2025 diluted weighted average number of common shares outstanding to likely increase to ~141,520 million.
Divide ~$702 million of FY2025 FCF by ~141.52 million shares and we get FCF/share of ~$4.96. Using the current share prices (~$257.50 and ~$209), the forward P/FCF for HEI shares is ~52 and ~42 for HEI-a shares.
Final Thoughts
I started acquiring HEI-a shares on September 16, 2019 @ ~$99 when I purchased 300 shares through a 'Side' account in the FFJ Portfolio. Over the years, I have periodically added to my exposure with the most recent purchases for the FFJ Portfolio having been 200 shares @ ~$189.54 on December 18, 2024. My total HEI-a exposure now consists of 900 shares in a 'Core' account and 400 shares in a 'Side' account.
A couple of young investors I am helping on their journey to financial freedom also own HEI-a shares (sub $150 average cost). I, however, exclude their holdings when determining my exposure.
When I completed my 2024 Year End Review, HEI had become my 9th largest holding. I will not know its ranking until I complete my 2025 mid-year review following the June 30 market close.
As noted in prior posts, HEI's 52 Week Price Range can be significant. The current range for the HEI-a shares is $170.82 - $237.76 and $212.37 - $300.67 for the HEI shares.
A good time to buy shares was in early April. Now? HEI's share prices will likely be much higher in the future but I am loathe to acquire shares given the current level of irrational exuberance. I will sit 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.
