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Following the release of Q3 and YTD2024 results on August 26, 2024, I disclosed the purchase of 100 HEICO (HEI and HEI-a) Class A shares @ ~$189.47 in a 'Core' account within the FFJ Portfolio in my August 27 post.
On October 28, I purchased an additional 100 Class A shares @ ~$195.58 through the same account. This purchase was disclosed in my FFJ Portfolio – October 2024 report.
After reviewing the Q4 and FY2024 results released following the December 17 market close, I acquired 300 shares @ $190.68.
My HEI-a exposure now consists of:
- 900 HEI-a shares in a 'Core' account at an average cost of ~$164.0861; and
- 400 shares in a 'Side' account at an average cost of ~$120.92.
HEI-a was my:
- 25th largest holding when I completed my 2023 Year End FFJ Portfolio Review; and
- 16th largest holding when I completed my 2024 Mid Year FFJ Portfolio Review.
Until such time as I complete my 2024 end of year review, I do not know its current ranking. I suspect, however, that it is still a top 20 holding.
In addition, two young investors (in their 20s) I am helping on their journey to financial freedom also have HEI-a exposure through their Tax Free Savings Accounts (TFSA) and First Homeowner Savings Accounts (FHSA). I do not, however, include their holdings when disclosing my exposure. I merely mention this in the event you are a young investor seeking to invest in a great company for the very long term.
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 (non-voting) since these are the shares I own.
- Do not confuse HEICO Corporation with privately owned The Heico Companies.
Business Overview
Acquisitions have been an important element of HEI's growth strategy. Since 1990, HEI has completed over 100 acquisitions complementing the niche segments of the aviation, defense, space, medical, telecommunications and electronics industries in which it operates. Fortunately, HEI has a much improved website that includes a section with links to the websites of many subsidiaries. This enables us to learn about their respective operations.
Naturally, HEI's 2023 Annual Report/Form 10-K is a must read if there is any thought of investing in the company.
HEICO's Acquisition Strategy
HEI has made multiple acquisitions over the years. Looking at HEI's Press Releases, we see that it continues to make bolt-on acquisitions.
It makes conservative use of debt and uses its strong cash flow to reduce debt taken on for the purposes of making acquisitions.
Management regularly articulates that its synergistic acquisitions are structured to be accretive to earnings within the year following closing.
Financials
Q4 and FY2024 Results
HEI's most recently released financial results are accessible in the Form 8-K released on December 17; the Form 10-K has yet to be released.
We see that at FYE2024, HEI's non-GAAP Financial Measures have improved substantially from those reported at FYE2023.
HEI's debt surged at FYE2023 following the completion of the:
- Exxelia International acquisition on January 5, 2023; and
- Wencor Group, the largest acquisition in the company’s history, on August 4, 2023.
Conventional And Modified Free Cash Flow (FCF) Calculations (FY2016 - FY2024)
FCF is a non-GAAP measure, and therefore, the manner in which it is computed 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 including my recent Adobe – Conventional Free Cash Flow Calculation Is Misleading and Pass On PepsiCo 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.
FY2025 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 stable outlook (last reviewed on June 20, 2023)
- Fitch: BBB with a stable outlook (last reviewed on September 4)
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 used 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.
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.
On December 17, 2024, HEI declared its 93rd consecutive semi-annual cash dividend since 1979; the dividend history is accessible here.
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
Trying to gauge HEI's valuation based on GAAP earnings is a challenge because of the magnitude of its non-cash depreciation and amortization. I, therefore, prefer to gauge HEI's valuation using Price/FCF.
In my August 26 post I stated:
HEI has generated $424.5 million of FCF in the first 3 quarters of FY2024. If HEI generates $140 million of FCF in Q4 (similar to the average $141.5 in the first 3 quarters), we can expect ~$564.5 million of FCF in FY2024.
The diluted weighted average shares outstanding in the first 3 quarters is 140.086 million. Let's assume this increases to 140.2 million for all of FY2024. HEI's FCF/share should be ~$4.03 ($564.5 million/140.2 million).
Using my recent $189.47 purchase price, I ended up acquiring shares with a P/FCF of ~47. Definitely not a 'fire sale' but I'll look back at this purchase a decade from now and will probably tell myself 'Big Deal!'
We now know that HEI's FY2024 results were superior than my forecast; it generated $4.38 and $4.246 of FCF/share calculated using the conventional and modified methods. Using my $190.68 purchase price on December 18, the P/FCF is ~43.5 and ~45 using FCF/share calculated using the conventional and modified methods.
Final Thoughts
'Investing is where you find a few great companies and then sit on your ass.' - Charlie Munger
HEI shares are rarely, if ever, on sale. Short-sighted investors, therefore, are unlikely to find HEI to be an appealing investment.
Past performance is not indicative of future performance. It is, however, difficult to overlook HEI's historical track record of creating shareholder wealth.
HEI's wealth creation formula has enabled many of its employees to become millionaires. In addition, the manner in which HEI structures the terms of its acquisitions enables it to retain the commitment of business owners who sell their companies to HEI.
Looking at Note 11. Redeemable Noncontrolling Interests in the FY2023 Form 10-K (page 102 of 131), we see various instances in which the owners who sold their businesses to HEI have the right to sell their redeemable noncontrolling interests to HEI. In some cases, the earliest year in which they could have sold their remaining rights to HEI was a few years ago.
If these former business owners were so eager to 'exit', it stands to reason that they would have sold their noncontrolling interests at the earliest opportunity. The retention of their right to sell their remaining interest to HEI several years beyond their 'Earliest Put Right Year' sends a positive signal that these former business owners are very pleased with the arrangement they negotiated with HEI. The decentralized structure of the company allows these former owners to continue to feel in control of the business they sold AND they can participate in the success of HEI as a whole.
I do not make investment decisions based solely on the actions taken by Berkshire Hathaway (BRK-a and BRK-b). It is, nevertheless, encouraging that BRK saw what I see in HEI and decided to invest in the company; the November 14, 2024 13F-HR SEC filing reflects BRK's HEI exposure as being 1,049,687 shares.
In FY2014, HEI generated ~$1.13B of annual revenue. In FY2024, it generated $3.858B. Unless something drastic happens to the company, I envision it will generate (at the very least) $7B of revenue in another decade. If it can continue to generate at least a 20% Operating Margin, it stands to reason that it should be able to generate ~$1.4B of Operating Income in 10 years; it 'only' generated ~$0.824 in FY2024.
In my opinion, investors with the intestinal fortitude to invest in what is currently a richly valued company have the opportunity to considerably increase the value of their investment over the next decade. The requirement, however, is to invest and then 'sit on your ass'.
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.
