The COVID-19 pandemic has devastated airlines, and weighed heavily on aerospace companies that rely on aviation for substantial portions of their revenue. Boeing (BA 0.19%), for example, has lost nearly half of its value in 2020, and some suppliers further down the food chain have been hit harder.
Heico (HEI 0.16%) has held up better than most, but it too is feeling the impact of the pandemic. Here's a look at how Heico has fared through the crisis, and whether the stock is an attractive buy today.
A diverse set of businesses
Heico is best known as an aerospace supplier, but it is its lesser known non-commercial aerospace businesses that have done the heavy lifting so far in 2020. The company generates about half of its sales from the defense, space, medical, and electronics end markets, and those units have been able to offset some of the weakness in airline-related revenue.
The company in late August reported fiscal third-quarter results that beat consensus estimates on both earnings and revenue thanks in large part to the businesses contained within its electronic technologies unit. The non-flight businesses have grown sales by 4% through the first nine months of Heico's fiscal year, generating a 29% operating margin.
Image source: Getty Images.
Flight support revenue, by comparison, was down 20% year over year in the last nine months.
Heico has a relatively clean balance sheet, with total long-term debt of $739 million or about 38% of shareholder equity. The company has no significant debt maturities until fiscal 2023, and feels good enough about its liquidity position that it has continued to aggressively shop for acquisitions during the pandemic.
Nine months into Heico's fiscal year, the company has made six small acquisitions.
When will aerospace come back?
The electronics businesses have helped results to hold up through the pandemic, but Heico needs aviation to return to really soar. The company believes its specific role in the commercial aerospace supply chain will help it to recover faster than a lot of original equipment manufacturers including Boeing.
Heico's business is focused primarily on the aftermarket, or sales of replacement parts. As airlines slowly recover and rebuild their flight schedules they are likely to lean heavily on their existing fleets instead of further stretching their balance sheets by committing to new aircraft purchases. That should create opportunities for companies like Heico focused on the aftermarket.
Heico largely built its portfolio of aerospace products through small acquisitions, and many of its replacement products are engineered as updated versions of the parts they are replacing. For that reason, a large number of the parts the company sells can make older planes more fuel efficient and cheaper to operate. That makes it easier for airlines to justify purchasing the parts even in the middle of a downturn.
"We believe demand for our favorably priced commercial aviation products and services will return in advance of the overall market recovery," Eric A. Mendelson, Heico's co-president and head of its flight support group, said in the company's August release. "Furthermore, we believe our cost-saving solutions and robust product development programs will enable us to potentially increase market share and emerge with a stronger presence within the commercial aviation market."
I think Heico is correct that aftermarket sales will recover quicker than the overall market, though it remains to be seen how much its product mix helps the company to rebound. There are also new risks to aftermarket vendors, including airlines scavenging planes that have been parked for spare parts instead of buying from vendors, but Heico's portfolio should hold up better than other, more commoditized, aerospace vendors.
Is Heico a buy?
Early in the pandemic I said Heico was the top choice for investors looking to buy into commercial aerospace. That's proven to be good advice, as Heico fell less than its commercial aerospace rivals and has recovered quicker.
Aerospace company data by YCharts
There's arguably less uncertainty now than there was back then, though the outlook is still grim. It appears major airlines will be able to survive COVID-19 without liquidations, but the recovery will take years and not quarters.
I still think aftermarket companies will recover before new equipment manufacturers, and Heico still appears to be a safe haven for investors wanting to invest in a commercial aerospace recovery and are willing to wait out the storm.
The only issue is the stock has recovered much faster than the end markets, and Heico is no value stock. The company currently trades at 55 times forward earnings estimates, and 7.7 times expected sales. That's higher than the 45 times forward PE ratio and 6.5 times forward sales multiples from January before the pandemic.
Meanwhile, there are other intriguing ways to invest in an eventual aviation rebound without having to pay that premium valuation.
Heico is a solid company worth holding on to if you own it, but given its valuation and the slow expected pace of a recovery it's not one I'm rushing out to buy today.
