HEI : NYSE : US$52.05 BUY
HEICO is a leading provider of commercial aerospace
spare parts and repair services, as well as niche
technology and electronic products for the space,
defense, industrial, medical and other markets. The
company reports its results in two operating segments:
Flight Support Group (FSG) and the Electronic
Technologies Group (ETG).
Transportation and Industrials — Airlines and Aerospace
HEI is scheduled to report its Q3/14 results after the market close
on Aug. 26. In our view, sentiment on the stock has turned overly
negative due to concerns about slower growth in the commercial
aerospace market, margin improvement in the defense business,
and valuation. We believe the long-term positive thesis still holds,
and we believe the Q3/14 results will provide a positive catalyst.
We are maintaining our BUY rating and our $65 price target.
HEI management has gone out of its way to stress the
difficult Q3/13 comp (up 17% organic growth) in the FSG
segment. The comp Q2/14 results point to ~10% quarter for
FSG, which is in our model. We see the downside of FSG
organic growth as high single-digits. We believe anything
over 10% will be a strong catalyst, but an in-line quarter
(FSG organic growth of 8-10%) will not disappoint investors.
We expect some ETG margin improvement (we model in
23%) but expect an additional step up in Q4/14.
We believe HEI will raise its EPS guidance to up ~15%, from
the current 13%, which implies 2014 EPS of $1.76. We are
maintaining our 2014 $1.79 EPS estimate. We do not expect
any increase to the revenue guidance.
Our $65 price target is based on the average of a 32.0x EPS
multiple and a 15.0x EBITDA multiple, applied to our 2015