HEI Stock Study (1-18-23)

I recently did a stock study on HEICO Corp. (HEI) with a closing price of $165.46.

This medium-sized company has grown sales and EPS at annualized rates of 8.8% and 15%, respectively, since 2013. Visual inspection shows lines mostly up, straight, and parallel with a slight pullback in ’20 [and ’21 for EPS]. PTPM has increased from 17.9% to 22.2% over this time while mostly trending higher. The 5-year average is 20.9%, which far outpaces peer (stated by M* as AJRD, HWM, and DRS) and industry averages.

ROE has been flat to slightly lower over the last decade going from 17.6% (2013) to 14.2% (2022). At 16.6%, the 5-year average slightly outpaces the peer average. Debt-to-capital has fallen from 38.4% (2013) to 10.5% (2022) with a 5-year average of 20.2%. This is significantly less than peer and industry averages. Interest Coverage is an impressive 77.

Value Line writes:

     > HEICO Corp. engages in the design, manufacture, and sale of aerospace,
     > defense, and electronics-related products and services. It operates in
     > two segments: The Flight Support Group (50% of 2021 sales) designs and
     > manufactures jet engine and aircraft component replacement parts. The
     > Electronic Technologies Group (50%) manufactures various electronic,
     > microwave, and electro-optical products.

I assume long-term annualized sales growth of 10% based on the following:

• CNN Business projects 18.2% YOY and 12.8% per year for ’22 and ’21-’23, respectively (based on 13 analysts).
• YF projects YOY 17.9% and 7.6% for ’23 and ’24, respectively (13 analysts).
• Zacks projects YOY 15.3% and 8.4% for ’23 and ’24, respectively (4).
• CFRA projects 32.5% YOY (the annual totals actually don’t add up correctly) and 9.8% per year for ’23 and ’22-’24.
• Value Line projects 13.6% annualized from ’21-’26.
• M* offers a 2-year ACE estimate of 16.3% per year.

I assume long-term annualized EPS growth of 11% based on the following:

• CNN Business reports ACE of 18.8% YOY and 16% per year for ’23 and ’22-’24, respectively (based on 13 analysts).
• MarketWatch projects 16.2% and 14% per year for ’22-’24 and ’22-’25, respectively (14 analysts).
• Nasdaq.com projects annualized rates of 11.1% and 10% for ’22-’24 and ’22-’25, respectively (12, 4, and 3 analysts for ’22, ’24, and ’25).
• YF projects YOY 18.8% and 12.5% for ’23 and ’24, and 14.1% annualized for the next five years (13).
• Zacks projects YOY 15.7% and 9.8% for ’23 and ’24, and 12.6% annualized for the next five years (4).
• Value Line projects 15.5% per year from ’21-’26.
• CFRA projects 32.5% YOY for ’23, 22.7% per year from ’22-’24, and a 3-year annualized EPS projection of 18%.

I project a future High P/E of 49. High P/E has ranged from 32.3 (’15) to 67.4 (’21) over the last 10 years with a last-5-year average of 60.5. The trend continues higher, but I don’t expect this to continue forever. Even the lowest value in the last five years (49.5 in ’17) is outside my comfort zone, but I will use it anyway.

I project a future Low P/E of 27. Low P/E has also trended higher from 19.5 (’13) to 49.8 (’22). The 5-year average is 36.1. Excluding ’21-’22, the highest value in the last 10 years is 29.9 (’19) and the last-5-year average then becomes 27.4.

I project a future low price of $107.40. The default value of $68.80 is over 58% below the previous closing price. I am therefore using the 2021 low, which is still over 35% below current.

All this results in an U/D ratio of 0.8, which puts HEI in the Hold zone. CAR (using forecast High P/E) is 5.1% and PAR (using forecast average P/E) is -0.1%. For me, the latter almost screams sell.

This study feels more aggressive than usual for me and still pegs HEI far from the Buy zone.

I use Member Sentiment to assess margin of safety (MOS). Based on 151 studies over the past 90 days, averages for projected sales, EPS, High P/E, and Low P/E are 10%, 12%, 44.6, and 26.5, respectively. I’m a bit lower on the second and third. Member Sentiment gives the average projected low price as 74.02: close to the default price I rejected. In other words, I overrode to a more aggressive value and still landed far from the Buy zone. Overriding is effectively raising the projected Low P/E so my MOS is probably not much to speak of.

In summary, HEI stock price for the time being seems to have fulfilled its appreciation potential despite solid growth estimates. For a purchase, I’d like the stock to revisit $130 before I reevaluate the projected low price to see if I still feel comfortable with [having raised] it.