HEI.A - Heico

[Beekman]

HEI is significantly overvalued in my view. Trades at a dramatic premium to other high quality compounders and has significant earnings risk this year. Not only does it seem like flying should have a prolonged rebound period, but with older airplanes going into storage as air traffic declines this year, HEI's FSG business should be impacted beyond just 2020 from reduced flying hours. Anyone who thinks it's a buy here? Seems to have held up pretty well ytd relative to most of the sector.

[valueinvestor]

HEI is significantly overvalued in my view. Trades at a dramatic premium to other high quality compounders and has significant earnings risk this year. Not only does it seem like flying should have a prolonged rebound period, but with older airplanes going into storage as air traffic declines this year, HEI's FSG business should be impacted beyond just 2020 from reduced flying hours. Anyone who thinks it's a buy here? Seems to have held up pretty well ytd relative to most of the sector.

 

For sure, but I've invested knowing that because it was the cheapest entry point with a 30% decline, if it declines further, I'll buy more - as it's sized properly. If you check their annual report from 2001 during 9/11, they've been great stewarts of capital.

[samwise]

Any concerns about survival of HEI relative to TDG?

 

TDG has way more debt but.

1. It has a lot more cash, and raised more recently

2. It just cost aggressively to survive this crisis

3. It's debt has no covenants

4. The debt is much further out than Heico's. No cash needed or refinancing needed until after HEI.

5. It seems to have less defense etc, so may be suffering more percentage revenue decline.

 

Both are exposed to the same recovery in airline miles, so in a bad scenario, seems like TDG could have more runway (assuming similar cash burn). HEI doesn't seem to have much cash on hand. it has covenants. which limit it's ability to raise too much debt.

 

Appreciate any replies.

[kab60]

Their equity is still pretty expensive on headline numbers, they can just print some stock? Or get a new debt package. Haven't seen any lenders unwilling to waive covenant tests for 6-12 months for a little fee. Dont see how they'd go BK.

[samwise]

They don't seem concerned though. They haven't raised any liquidity, debt, line of credit or equity. TDG has, even though they have billions already. Similarly they seem less aggressive in cost cuts.

 

Is HEI banking on a quick recovery, or has less cash burn? What if there isn't a quick recovery?

[Gamecock-YT]

maybe the eye doctor will bail them out.

[samwise]

Eye doctor?

[Liberty]

Eye doctor?

 

https://www.forbes.com/sites/maddieberg/2019/02/19/the-greatest-investor-youve-never-heard-of-an-optometrist-who-beat-the-odds-to-become-a-billionaire/#2bcc3b4122e8

[samwise]

Eye doctor?

 

https://www.forbes.com/sites/maddieberg/2019/02/19/the-greatest-investor-youve-never-heard-of-an-optometrist-who-beat-the-odds-to-become-a-billionaire/#2bcc3b4122e8

 

Interesting.

 

I should rephrase my original question. What’s is their cash burn currently, and how long can they survive with current liquidity, without depending on the kindness of friends or strangers.

 

I don’t worry quite as much for TDG, since their liquidity position is much better. But HEI is safer on leverage and their client relations. I’d buy HEI but can’t answer the short term liquidity question.

[Spekulatius]

Eye doctor?

 

https://www.forbes.com/sites/maddieberg/2019/02/19/the-greatest-investor-youve-never-heard-of-an-optometrist-who-beat-the-odds-to-become-a-billionaire/#2bcc3b4122e8

 

Interesting.

 

I should rephrase my original question. What’s is their cash burn currently, and how long can they survive with current liquidity, without depending on the kindness of friends or strangers.

 

I don’t worry quite as much for TDG, since their liquidity position is much better. But HEI is safer on leverage and their client relations. I’d buy HEI but can’t answer the short term liquidity question.

 

Virtually any dogshit company can borrow money now - BA just borrowed $25B - why shouldn’t a company like Heiko not be able to access the debt market?

 

Besides, Heiko has significant exposure to industrial markets and defense, so they do have some flow coming in. I don’t think they have any trouble raising some debt. I do think they should use their premium valuation to raise equity and do some acquisitions.

[samwise]

 

Virtually any dogshit company can borrow money now - BA just borrowed $25B - why shouldn’t a company like Heiko not be able to access the debt market?

 

Besides, Heiko has significant exposure to industrial markets and defense, so they do have some flow coming in. I don’t think they have any trouble raising some debt. I do think they should use their premium valuation to raise equity and do some acquisitions.

 

Yes, while the fed keeps the credit markets open. Agreed.

 

Edit:

BTW I tried a DCF. If they have zero cashflow for three years and then starting from 4% FCF yield, to justify current price, they need to grow at 10% for 20 years and then 5% for the next 30 years. discounting at 10%.

 

People are confident of that sort of growth rate for a 10Billion company? or people are happy to accept a lower future return?

[Shane]

 

Virtually any dogshit company can borrow money now - BA just borrowed $25B - why shouldn’t a company like Heiko not be able to access the debt market?

 

Besides, Heiko has significant exposure to industrial markets and defense, so they do have some flow coming in. I don’t think they have any trouble raising some debt. I do think they should use their premium valuation to raise equity and do some acquisitions.

 

Yes, while the fed keeps the credit markets open. Agreed.

 

Edit:

BTW I tried a DCF. If they have zero cashflow for three years and then starting from 4% FCF yield, to justify current price, they need to grow at 10% for 20 years and then 5% for the next 30 years. discounting at 10%.

 

People are confident of that sort of growth rate for a 10Billion company? or people are happy to accept a lower future return?

 

Discounting at 10% in this interest rate environment doesn’t seem reasonable.  I think something a lot of investors have struggled with is anchoring bias on valuations.  If interest rates stay low for an extended period of time discount rates of 5-6% can reasonably be used and nearly everything is cheap.  Very unusual times we live in today.

[Spekulatius]

 

Virtually any dogshit company can borrow money now - BA just borrowed $25B - why shouldn’t a company like Heiko not be able to access the debt market?

 

Besides, Heiko has significant exposure to industrial markets and defense, so they do have some flow coming in. I don’t think they have any trouble raising some debt. I do think they should use their premium valuation to raise equity and do some acquisitions.

 

Yes, while the fed keeps the credit markets open. Agreed.

 

Edit:

BTW I tried a DCF. If they have zero cashflow for three years and then starting from 4% FCF yield, to justify current price, they need to grow at 10% for 20 years and then 5% for the next 30 years. discounting at 10%.

 

People are confident of that sort of growth rate for a 10Billion company? or people are happy to accept a lower future return?

 

Discounting at 10% in this interest rate environment doesn’t seem reasonable.  I think something a lot of investors have struggled with is anchoring bias on valuations.  If interest rates stay low for an extended period of time discount rates of 5-6% can reasonably be used and nearly everything is cheap.  Very unusual times we live in today.

 

My out er would be that if interest rates stay low for such a long time, it also means our economy and growth is going to be dogshit for a long time and you are unlikely to get 10% revenue growth either.

[Shane]

 

Virtually any dogshit company can borrow money now - BA just borrowed $25B - why shouldn’t a company like Heiko not be able to access the debt market?

 

Besides, Heiko has significant exposure to industrial markets and defense, so they do have some flow coming in. I don’t think they have any trouble raising some debt. I do think they should use their premium valuation to raise equity and do some acquisitions.

 

Yes, while the fed keeps the credit markets open. Agreed.

 

Edit:

BTW I tried a DCF. If they have zero cashflow for three years and then starting from 4% FCF yield, to justify current price, they need to grow at 10% for 20 years and then 5% for the next 30 years. discounting at 10%.

 

People are confident of that sort of growth rate for a 10Billion company? or people are happy to accept a lower future return?

 

Discounting at 10% in this interest rate environment doesn’t seem reasonable.  I think something a lot of investors have struggled with is anchoring bias on valuations.  If interest rates stay low for an extended period of time discount rates of 5-6% can reasonably be used and nearly everything is cheap.  Very unusual times we live in today.

 

My out er would be that if interest rates stay low for such a long time, it also means our economy and growth is going to be dogshit for a long time and you are unlikely to get 10% revenue growth either.

 

I've heard a lot of smart people make that argument, but it doesn't make sense to me.  Bernanke has said multiple times that at least part of the reason for low interest rates is a savings glut.  Recall Warren Buffet's comment that interest rates are gravity to stocks and that at very low rates stock valuation should be very high?  Growth has been dogshit for a long time and valuations have continued to expand.  I think of it as relative to other options.  If bonds yield nothing money sloshes to the next highest returning asset and that causes valuations to rise.  There is a LOT of money idle still, part of the issue with the wealth disparity.  Does that make sense?

 

Regarding Heico - they've gained market share coming out of every disruption of the airline industry.  They've done a pretty good job of penetrating aircraft owned by airlines, but there is still lots of room to grow.  On the other hand, aircraft leasing companies have been slow to use non-OEM replacement parts and that creates a ton of white space for HEICO.  They can easily grow 10% if they gain share even with a moderate contraction in the industry.  Bad news for the industry is less bad for HEICO than any other company in that industry that I know of.  Let's also not forget this will create unbelievable M&A opportunities.  In a recession the robust high quality companies tend to only become stronger and long-term trends tend to accelerate.  HEICO is a company that benefits from both.

 

 

[SHDL]

Right, it’s true that GDP growth will likely be muted if interest rates stay low but Heico is such a small component of the overall economy that it can keep growing much faster than GDP for a pretty long time as it has in the past.

[Jurgis]

Discounting at 10% in this interest rate environment doesn’t seem reasonable.  I think something a lot of investors have struggled with is anchoring bias on valuations.  If interest rates stay low for an extended period of time discount rates of 5-6% can reasonably be used and nearly everything is cheap.  Very unusual times we live in today.

 

If you discount at less than 10%, then there are a lot of other companies that are attractive too or maybe even more attractive. Some of them growing faster and possibly with better economics.

 

You could discount FB and GOOG at 10% close to current prices and still make sense with current valuations.

[samwise]

 

The business should grow organically at more than 6%. Why? Revenue passenger miles have grown and should continue to grow in the following years at ~5.5%.

 

In addition to that, PMA parts might/should take share from OEMs as airlines and lessors get comfortable with this option.

 

In addition, Heico might use some pricing power.

 

Besides organic growth, we expect further acquisitions. If the company uses most of the free cash flow in acquisitions and maintain their historic discipline, then we could expect that to add another ~7% to operating earnings.

 

That gets us to 6% organic growth plus 7% growth form acquisitions, or 13% without using the balance sheet capacity.

 

 

This quote from long ago is how the growth rate is justified.

 

The growth by acquisition gets harder with size. But so far so good.

 

The growth in air traffic seems safer. A big driver emerging markets growth in gdp per capita, leading to increasing usage of air travel.  There is some risk of growth faltering with the new possibility of de-globalization. But this IMHO is a lower risk than running out of acquisitions large enough to move the needle.

 

It seems a 5-6% growth rate is safe to assume, and the rest is dependent on successful acquisitions.

[Liberty]

I should rephrase my original question. What’s is their cash burn currently, and how long can they survive with current liquidity, without depending on the kindness of friends or strangers.

 

I don’t worry quite as much for TDG, since their liquidity position is much better. But HEI is safer on leverage and their client relations. I’d buy HEI but can’t answer the short term liquidity question.

 

I have no worry about that. A bunch of their defense/electronics/space/industrial revenues will keep coming, they have lots of borrowing capacity, and the market knows that this is temporary (even if it can be rough while it lasts). Their survival isn't in question at all, IMO.

[samwise]

I should rephrase my original question. What’s is their cash burn currently, and how long can they survive with current liquidity, without depending on the kindness of friends or strangers.

 

I don’t worry quite as much for TDG, since their liquidity position is much better. But HEI is safer on leverage and their client relations. I’d buy HEI but can’t answer the short term liquidity question.

 

I have no worry about that. A bunch of their defense/electronics/space/industrial revenues will keep coming, they have lots of borrowing capacity, and the market knows that this is temporary (even if it can be rough while it lasts). Their survival isn't in question at all, IMO.

 

Thanks. Yes defence will help, even though commercial airlines traffic is down 80-90%. And as Spek said, any company can borrow now.

Do you still believe in 10% growth rates after the recovery?

[Shane]

Discounting at 10% in this interest rate environment doesn’t seem reasonable.  I think something a lot of investors have struggled with is anchoring bias on valuations.  If interest rates stay low for an extended period of time discount rates of 5-6% can reasonably be used and nearly everything is cheap.  Very unusual times we live in today.

 

If you discount at less than 10%, then there are a lot of other companies that are attractive too or maybe even more attractive. Some of them growing faster and possibly with better economics.

 

You could discount FB and GOOG at 10% close to current prices and still make sense with current valuations.

 

Yes.

 

[Liberty]

Do you still believe in 10% growth rates after the recovery?

 

Who knows what will happen, but I could see a future where the industry as a whole grows slower for a while but Heico gains share faster since they help their customers reduce costs and that'll matter more than ever for a while. Another mitigating factor is that they may grow slower, but be able to acquire companies at lower multiples and/or more of them.

[samwise]

 

Who knows what will happen, but I could see a future where the industry as a whole grows slower for a while but Heico gains share faster since they help their customers reduce costs and that'll matter more than ever for a while. Another mitigating factor is that they may grow slower, but be able to acquire companies at lower multiples and/or more of them.

 

Thanks. Yes anything is possible. They might even make a very cheap acquisition in this environment.

 

[scorpioncapital]

Do they have a lot of cash to make acquisitions?

[samwise]

Do they have a lot of cash to make acquisitions?

 

No. I think they have will need to raise debt. Not saying it will happen, but it might.

 

By way of comparison, TDG is very proactive. They raised debt, and said it was insurance against a longer downturn. I like that strategy: raise debt when it’s available, not when you need it. I still don’t understand why HEI hasn’t done this. Maybe their covenants are too restrictive, or their cash burn much smaller than TDG.

[Liberty]

Q1 is out: https://www.businesswire.com/news/home/20200526005811/en/HEICO-Corporation-Reports-Quarter-Fiscal-2020-Results

 

sale -9%, net income -8%, op. income -9%, op. margin 23.1%

 

FSG: sales -18%, op. income -24%, op. margin 18.9% (vs 20.2% YoY)

 

ETG: sales +2% (-2% organic), op. income -3%, op. margin 29.9% (vs 31.4% YoY)

 

Our net debt to EBITDA ratio decreased to .72x as of April 30, 2020, down from .93x as of October 31, 2019.

 

We have no significant debt maturities until fiscal 2023 and plan to utilize our financial strength and flexibility to aggressively pursue high quality acquisitions of various sizes