Core Portfolio Insight: HEICO

August 25, 2021

HEICO (Ticker: HEI/A) is a leading aftermarket supplier of parts for the aviation industry. The company is led by CEO Larry Mendelson, Co-President Eric Mendelson, and Co-President Victor Mendelson. Larry has been CEO of HEICO since 1990, Eric is President of HEICO's Flight Support Group (FSG), and Victor is President of HEICO's Electronic Technologies Group (ETG). 

Larry describes HEICO not as an aerospace or electronics company but a "vehicle that generates strong cash flow". HEICO places a high importance on cash generation and long-term sustainable growth. The company operates with a unique entrepreneurial culture and a decentralized model where its businesses focus on specific products. Management gravitates to niche products and services that have high barriers to entry, while maintaining a solid balance sheet with flexibility for quality acquisitions. On its latest earnings call, management noted that it has done 80+ acquisitions without a single one going wrong.  

HEICO's business took a hit during the pandemic as air travel came to a halt. During this time, HEICO's conservative history and strong liquidity came in handy as it allowed the company to expand market share, continue to do high quality acquisitions, and treat its employees as important members of the HEICO family through maximum profit sharing contributions despite missing budgets. Here is what management said during the Q1 2021 earnings call:

In Q3, FSG, which was most impacted by the pandemic, reported sales growing 3% sequentially, on top of 16% sequential growth the previous quarter. This was the fourth straight quarter of sequential growth for FSG. FSG's profit margin is nearing pre-pandemic levels. Management thinks business can return fully to 2019 levels by the end of 2022. 

In conclusion, HEICO checks off the boxes as a GPM Grade Company. Its high returns on invested capital (ROIC), cash flow focus, owner-operated culture, and growth opportunities (PMA parts) make it an attractive stock for us to own in portfolios. 

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