Airplanes play a huge role in the modern world. They are used to transport people for various purposes including leisure, business, relocation, etc. They are also used for transporting goods to places that otherwise might not have access to said items. Add to that the fact that airplanes are incredibly large and complex pieces of equipment that require countless parts to operate, and it’s no surprise that there are a large number of companies dedicated to supplying goods and services. services to do industry function. One such player is a company called HEICO (NYSE: HEI). Although it is far from the largest company in the aerospace market, it claims to be the world’s largest producer of FAA-approved jet engine spare parts and aircraft components excluding OEMs and their subcontractors. But just because a company is an industry leader doesn’t make it a great prospect to buy. Admittedly, the company’s shares have outperformed the market over the past two months. But given the high price of the shares, it is difficult to imagine them rising further. While I wouldn’t go so far as to call the company “sold”, I think the stock is approaching that point.
In mid-October of this year, I wrote a follow-up article on the investment value of HEICO. At that time, I spoke about how the company had continued to deliver strong revenue and earnings growth in an admittedly challenging environment. My overall conclusion is that the company should continue to do well over the long term. But good performance from a fundamental perspective doesn’t always translate into good performance from a stock price perspective. Given the high stock price at the time, I felt that a more appropriate rating for the company was a “take” to reflect my view that the stock should either go up or down. that would more or less match what the wider market is expected to achieve. Since then, the company has managed to outperform the market, but only slightly. While the S&P 500 is up 4.4%, HEICO shares generated a 5.7% gain.
To understand why the company continues to raise prices, one need only look at its fundamental performance for the last quarter of its fiscal year 2022. This is the only quarter for which new data is available that was not available when I last wrote about this. During this quarter, revenues totaled $609.6 million. This is 19.7% more than the $509.4 million generated in the same period a year earlier. This is not the only quarter in which the company’s sales have been strong. Improved commercial aerospace market instrumental in increasing sales year-over-year and increasing sales, sequentially, for nine consecutive quarters, management says for its flight support group. The company also received help with other parts of its operations, such as its electronics technology group, which saw a 6% year-over-year sales increase thanks in large part to acquisitions, some of which were offset by lower organic revenue.
This increase in turnover is accompanied by an improvement in profitability. Net income of $97.2 million in the final quarter of 2022 beat the $86.1 million reported a year earlier. Operating cash flow increased from $110 million to $144 million. However, if we adjust for changes in working capital, the increase would have been smaller, with the metric dropping from $124.2 million to $139.7 million. Meanwhile, the company’s EBITDA also increased from $139.5 million to $172.2 million.
As I mentioned before, this was not the only positive period for the company from a fundamental point of view. Full-year 2022 financial performance was strong. Sales of $2.21 billion represented a year-over-year improvement of 18.3% from the $1.87 billion generated just a year earlier. This also resulted in improved profitability. Net income increased from $304.2 million to $351.7 million. Operating cash flow increased from $444.1 million to $467.9 million, while the corresponding adjusted figure increased from $427.5 million to $513 million. EBITDA also increased from $487.4 million to $593.7 million.
We don’t really have a clue what 2023 would look like. But using 2022 data, we can calculate that the company is trading at a price/earnings multiple of 51.7. This is significantly higher than what I normally value from a company. For context, however, it is lower than the reading of 59.8 that we would obtain using data from the previous year. Even though the company is cheaper from a cash flow perspective, the price to operating cash flow multiple is still very high at 35.5. That compares to the 42.5 reading we get using 2021 data. Meanwhile, the company’s EV/EBITDA multiple is 31.4. That compares to the 38.3 reading we get using 2021 data.
As I do in most of my other articles, I decided to compare the company to five similar companies. On a price-earnings basis, these companies ranged from a low of 15.6 to a high of 49.5. Using the price/operating cash flow approach, the range was 6.8 to 28.8. Meanwhile, the companies’ EV/EBITDA multiple ranged from 8.6 to 19.5. In all three cases, our prospect was the most expensive of the bunch, with one of those cases making him significantly more expensive than the next most expensive company.
|Company||Prizes / Earnings||Price / Operating Cash||EV / EBITDA|
|Howmet Aerospace (HWM)||38.3||28.8||19.5|
|Elbit Systems (ILEC)||15.6||23.9||8.6|
|Rolls-Royce Holdings (OTCPK: RYCEY)||49.5||6.8||10.2|
|Huntington Ingalls Industries (HII)||16.1||21.2||10.4|
I understand that this is a space that investors love. In the long term, I have full confidence that the industry will thrive. As the world’s population grows and trade continues to increase, the need for aircraft will only increase. This probably means that with good management, HEICO will follow. But the fact is that investors are paying a very high premium to have access to this almost guaranteed growth. I don’t mind paying a premium for quality and certainty. But right now, stocks are reaching the upper stratosphere and risk being overvalued. For now, I’ve decided to keep my “hold” rating. But I don’t know how long this can continue if the stock climbs further from here.
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