Author Topic: HEI.A - Heico  (Read 45403 times)

Liberty

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HEI.A - Heico
« on: February 04, 2015, 07:51:26 AM »
Thanks to moatsandvalue for mentioning it in the Transdigm thread. I had a quick look and thought we might as well have a thread for it.

Didn't take a deep dive yet, but it seems interesting.

It's an aerospace manufacturer and distributor (not just for planes, but also satellite stuff, etc), mostly operating in various niches. Doesn't seem to have the focus on sole-source that TDG has, and their margins are a fair bit lower because of it, but at least the focus on niches and equipment that saves money to their customers through higher efficiency puts them in a fairly good competitive position.

They've been compounding at very high rate for a few decades (around 20% for past 10-15 years, even higher in past 5 years), with FCF being much higher than earnings (over 150% in recent times). Most of it seems to be redeployed in M&A, as well as in regular and special dividends.

They seem fairly prudent with debt (debt-to-EBITDA at 1.23x), though not focusing on sole-source stuff where there's literally no competition, I don't think they could pull off safely the kind of gearing that TDG has.

The current CEO has been there since the early 90s, is 75, and owns 8%. His sons (I'm assuming -- same names, 46 and 48 years old) run the two main divisions and each own about 4%. Total insiders own 25% of the business.

They've been paying semi annual dividends since 1979 without missing one. They just increased it 17%.

One strange thing is that the HEI.a shares sell for a significant discount over the HEI common despite the only difference being that the .a has 1/10th the votes (47 vs 62). Certainly not something you see with the Malone companies, where the C shares with no votes often trade at par or above the class A...

"No one customer accounted for more than 10% of net sales and our top five customers represented approximately 17% of consolidated net sales."

You can see the company history here: http://www.heico.com/about-us/who-we-are/our-history/

Here are their subsidiaries to give you an idea of the kind of things that they make: http://www.heico.com/about-us/subsidiaries/

ROIC with Greenblatt's method is pretty strong (mid 50s for past few years, barely dipped below 40 in 2009).

HEI.a is selling for about 18.5x TTM FCF, which isn't cheap, but might not be expensive if the business is as good quality as it seems on first glance.

As I said, this isn't a deep dive. I just spent a couple hours on it, so there might be tons of stuff I'm missing (maybe including big cockroaches). I just found it interesting enough to create a thread and see if others an opinions on it. Cheers.
« Last Edit: May 23, 2015, 09:47:12 AM by Liberty »
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Liberty

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Re: HEI.A - Heico
« Reply #1 on: February 25, 2015, 09:47:31 AM »
Nobody seems to give a crap. But this got cheaper today.
« Last Edit: February 25, 2015, 10:32:15 AM by Liberty »
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berkshire101

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Re: HEI.A - Heico
« Reply #2 on: February 25, 2015, 10:27:08 AM »
I give a crap, but it seems rather expensive still.

Liberty

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Re: HEI.A - Heico
« Reply #3 on: February 25, 2015, 11:01:26 AM »
I give a crap, but it seems rather expensive still.

Out of curiosity, what multiple of FCF would you consider paying for it?
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berkshire101

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Re: HEI.A - Heico
« Reply #4 on: February 25, 2015, 12:19:51 PM »
I give a crap, but it seems rather expensive still.

Out of curiosity, what multiple of FCF would you consider paying for it?

The business earns about 13-15% return on capital.  So on paper that's how much book value (including dividends paid and share repurchases) would grow by over the long-term.  If I'm happy with 13-15% annualized returns over the long-term then I would pay around 15-17 times free cash flow.  It's trading for around 23 times I believe. 

What about you Liberty?

Liberty

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Re: HEI.A - Heico
« Reply #5 on: February 25, 2015, 12:32:52 PM »
I give a crap, but it seems rather expensive still.

Out of curiosity, what multiple of FCF would you consider paying for it?

The business earns about 13-15% return on capital.  So on paper that's how much book value (including dividends paid and share repurchases) would grow by over the long-term.  If I'm happy with 13-15% annualized returns over the long-term then I would pay around 15-17 times free cash flow.  It's trading for around 23 times I believe. 

What about you Liberty?

I didn't redo the math, but when I first looked to write the original post of this thread, HEI.a was selling for about 18.5x TTM FCF. Probably a bit lower than that now (HEI is more expensive than HEI.a despite only difference is having votes).

They've been growing FCF/share at around 20% CAGR for 10-15 years (faster than that past 5 years).

IMO Paying under 18x FCF for that isn't very expensive.

But as I said, I prefer TDG.

I think the traditional ROIC calculation can be misleading for these types of businesses. TDG only has low teens ROIC, but they have goodwill that doesn't need to be replaced and one-time restructuring charges, etc. This muddies the picture.

If you look at Greenblatt's ROIC measure instead, HEI is closer to 55% returns and TDG is in the 120-130% range. That doesn't tell you what your return will be (IMO FCF/share growth is a better measure of that), but it tells you a lot about the quality of the underlying business if you put aside some of the noise.
« Last Edit: February 25, 2015, 12:35:33 PM by Liberty »
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rb

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Re: HEI.A - Heico
« Reply #6 on: February 25, 2015, 02:45:46 PM »
I just did the calc and for HEI.a I get FCF of about 150 Mn which means that the company is going for about 22x FCF.

The financials look clean and it's a lot less levered than TDG. Maybe they're being more conservative because the family owns so much of it and would like to stay rich. Probably the same reason why you don't see a lot of stock dilution.

They seem to have been able to make a lot of money on the acquisitions. Are they just good investors/operators or is there something else? Maybe some juicy defense contracts or something as well?

berkshire101

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Re: HEI.A - Heico
« Reply #7 on: February 25, 2015, 03:18:29 PM »
Also, isn't the aerospace industry cyclical?  Right now, we're in an up cycle so valuation tend to be higher.  So maybe there will be reversion to the mean and HEI will become a bargain.

Liberty

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Re: HEI.A - Heico
« Reply #8 on: February 25, 2015, 03:53:59 PM »
Also, isn't the aerospace industry cyclical?  Right now, we're in an up cycle so valuation tend to be higher.  So maybe there will be reversion to the mean and HEI will become a bargain.

With these businesses (though I know TDG better), the money is made on the aftermarket parts. As long as planes and helicopters fly, you need the parts.

One of the reasons why I prefer TDG is that almost all their stuff is sole-source, hence no competition and EBITDA margins of close to 50% :)
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Liberty

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Re: HEI.A - Heico
« Reply #9 on: February 25, 2015, 03:56:06 PM »
I just did the calc and for HEI.a I get FCF of about 150 Mn which means that the company is going for about 22x FCF.

The financials look clean and it's a lot less levered than TDG. Maybe they're being more conservative because the family owns so much of it and would like to stay rich. Probably the same reason why you don't see a lot of stock dilution.

They seem to have been able to make a lot of money on the acquisitions. Are they just good investors/operators or is there something else? Maybe some juicy defense contracts or something as well?


I was getting closer to 175m FCF TTM, but I just did it quickly so maybe I'm wrong.
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