HEICO posted record revenue and net income in its fiscal third quarter thanks to strong aftermarket demand and momentum from its M&A deals.
If there is one aerospace company that has benefited from the current commercial aftermarket super cycle, it is Heico.
The Hollywood, Florida-based manufacturer of jet engine and aircraft component replacement parts has had a string of high-performance quarters, with the latest reaching a peak in several respects in sales and net income.
In its fiscal third quarter (Q3) ended July 31, Heico's earnings per share of $0.97 beat a consensus estimate of $0.92 while revenue of $992 million jumped 37% year-over-year with the help of acquisitions.
Heico's Flight Support Group (FSG) segment reported 15% Q3 growth on the back of strong demand for aftermarket replacement parts and services. As Boeing and Airbus struggle to boost deliveries of new airplanes, airlines have no choice but to continue using older aircraft and engines that require spare parts and maintenance services.
Despite some concern in the aviation industry about softening consumer demand for air travel, other analysts see no sign of a slowdown in the aftermarket. In an Aug. 27 research note, Robert Spingarn of Melius Research said that the “health of the consumer is a legitimate debate and air traffic growth rates are normalizing,” but emphasized that “we continue to believe that the commercial aftermarket will be stronger for longer.”
In an earnings call, Heico CEO Larry Mendelson did acknowledge a slowdown in orders on the original equipment (OE) side. He said, “There’s no question Airbus is doing ... better than Boeing in that area. But yes ... things are softer than expected.” The fewer commercial OE orders have been offset by strong defense demand that Heico expects to continue into 2025, 2026 and beyond, Mendelson said.
At the same time, Heico is continuing to reap benefits from its $2 billion acquisition of aftermarket specialist Wencor. In the earnings call, Heico co-CEO Eric Mendelson lauded “Wencor’s entrepreneurial culture and record of producing high-quality products,” which he said continue “to produce wins in the marketplace.”
Heico's co-CEO highlighted successful cooperation between Heico and Wencor in several different areas, including utilization of the two companies’ PMA and DER parts at all its repair stations, commercial and defense aftermarket sales cooperation, and Wencor’s use of Heico's manufacturing base. A PMA designation from the FAA demonstrates that a company is authorized to manufacture aircraft components that meet industry standards. Compared to OEM components, PMA parts are usually 20% to 80% cheaper. DER repairs restore a broken component back to the initial design requirement. A DER repair part is exclusive to its approval holder and cannot be individually resold in the aftermarket like a PMA part.
With regards to future M&A deals, Eric Mendelson said that Heico's “pipeline today remains incredibly robust” with many projects in the works.
Larry Mendelson provided some more details about that pipeline. It seems that Heico is spoiled for choice, as he said that the company is “looking at actually too many acquisitions right now,” with the pipeline skewed more toward non-private equity transactions.
On Aug. 22, Heico announced that its FSG had acquired the Aerial Delivery and Descent Devices divisions of South Windsor, Connecticut-based Capewell Aerial Systems for an undisclosed amount. Capewell’s customer base includes large original equipment manufacturers, end-users and distributors.
“Looks like M&A is back on the menu,” Robert Stallard of Vertical Research Partners said in an Aug. 27 client note. HEICO continues to prefer non-private equity assets “where pricing tends to be more reasonable and HEICO’s reputation as a sound buyer is a plus,” he added.
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