Heico Stock: Record Revenue Not Enough To Satisfy Investors As Heico Falls After Earnings

Aug 26, 2023

Aerospace and defense components provider Heico (HEI) posted its ninth consecutive quarters of earnings growth for its Q3 results late Monday. Heico stock retreated in late trade.

Hollywood, Fla.-based Heico makes electronic equipment, components and parts for defense, aviation and aerospace customers. The company provides repair, manufacturing, engineering and reverse engineering services. Its weapons systems support military aircraft such as Lockheed Martin's (LMT) C-130 Hercules, the Boeing (BA) E-3 Sentry, as well as F-15 and F-16 fighter jets.

Heico earnings increased 23.3% to 74 cents per share while revenue leapt nearly 27% to a quarterly record $722.9 million. The company's earnings included a 3 cent per share impact from acquisition costs related to its Wencor buyout. Analysts expected earnings of 73 cents per share on $702 million in sales.

Heico's Flight Support Group segment saw net sales increase 23% to a record $405 million while operating income increased 26% to $89.2 million, driven by improvement in the commercial aerospace market. The Electronic Technologies Group posted a 33% jump in net sales to a record $325.9 million. ETG operating income rose 9% to $74.2 million.

The company's net debt ballooned 245% to $520.99 million during the first nine months of fiscal 2023 after closing two unsecured senior note offerings totaling $1.2 billion in late July. Heico used a portion of the proceeds to fund a portion of the Wencor acquisition and repay outstanding borrowings from its revolving credit agreement.

Heico expects strong product demand to fuel net sales growth in both business segments for the remainder of the 2023 fiscal year. However, the company noted inflationary pressures and lingering supply chain disruptions from the coronavirus pandemic may lead to higher material and labor costs.

The company averaged 17.3% earnings growth the past four quarters. Revenue averaged 24% gains during that time and sales growth accelerated the past two quarters.

On Thursday, Heico reported its subsidiaries 3D PLUS and Exxelia supplied mission-critical electronic components for India's Chandrayaan-3 spacecraft that landed on the Moon's South Pole Wednesday. India is the first country to successfully land in that area of the moon. The mission launched on July 14 from Sriharikota in southern India and entered lunar orbit on August 5.

A Russian attempt to land in the same region of the moon failed in a crash several days earlier.

Morgan Stanley resumed coverage of Heico stock on Aug. 18 with an equal weight rating and 184 price target. The firm believes airlines will prioritize cost savings after COVID-19 and that the market for manufacturer parts approval will outpace the aerospace aftermarket. Goldman Sachs is a bit more bullish on the parts provider and raised its price target on HEI stock the week prior. Analysts expect double-digit free cash flow growth in 2025 given the revenue and EBITDA gains from Heico's roughly $2 billion acquisition of aircraft repair company Wencor Group at the beginning of August. Goldman Sachs lifted its price target to 206 from 204 with a buy rating on shares.

Heico stock fell more than 5% after hours Monday. Shares ticked higher during the trade prior to the report. Heico rallied about 18.6% from its end-of-May low to their 2023 high of 182.18 on July 26.

Heico stock is trading in a flat base. That pattern has a 182.18 buy point according to MarketSmith data. It has formed a series of side-by-side bases, caught below resistance around 177 for most of the year. A significant break above that level could signal a move higher.

Shares posted a 9.1% gain in 2023 through Monday.

You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison

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