Heico Corp. (HEI +2.97%) has quietly been one of the best stocks on the market the past decade, outperforming the S&P 500's total return, 659% to 145%. It's performed so well by steadily growing its core aviation manufacturing business and acquiring companies that have been accretive to earnings.
The strong earnings streak continued in the second quarter of fiscal 2018 with double-digit top- and bottom-line growth. Here's a look at the key numbers and how management sees the rest of 2018 unfolding.
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Heico Corp: The raw numbers
| Metric | Q2 2018 | Q2 2017 | Year-Over-Year Change |
|---|---|---|---|
| Sales | $430.6 million | $368.7 million | 16.8% |
| Net income | $59.6 million | $45.7 million | 30.5% |
| Diluted EPS | $0.55 | $0.42 | 31% |
Data Source: Heico Corp Q1 2018 earnings release.
What happened with Heico this quarter?
Growth was driven by acquisitions Heico made in the past year, but there was also single-digit organic growth from the existing business.
- Net sales in the flight support group rose 16% to $267.8 million, helped by acquisitions and 5% organic growth. Operating income was up 15% to $51.5 million in the quarter.
- Sales in the electronic technologies group were up 20% to $168.7 million. Organic growth contributed 3% to growth, with the remaining 17% coming from acquisitions. Operating income was up 24% to $48.1 million.
- The tax cut passed by Congress in December 2017 resulted in Heico's fiscal tax rate falling from 29.5% a year ago to 14.8% this quarter. The positive impact on net income was $23.7 million, or $0.22 per share.
- Net debt to EBITDA fell from a ratio of 1.67 times six months ago to 1.55 times on April 30.
- Cash flow from operations was $95 million in the first six months of the fiscal year, and management expects full-year operating cash flow will be $310 million.
What management had to say
CEO Laurans Mendelson sees Heico's strategy working and expects more growth as the year goes on. In the earnings release, he said the company sees solid growth for the existing business and will continue to evaluate acquisitions:
As we look ahead to the remainder of fiscal 2018, we anticipate net sales growth within the Flight Support Group and Electronic Technologies Group resulting from increased demand across the majority of our product lines. Also, we will continue our commitments to developing new products and services, further market penetration, and an aggressive acquisition strategy while maintaining our financial strength and flexibility.
Acquisitions have been a key to Heico's long-term growth, and with a net-debt-to-EBITDA ratio in the mid-single digits, there's ample room to finance growth acquisitions if management would like to.
Looking forward
The strong results in the first quarter have given management enough confidence to increase guidance for the full year. It increased sales growth guidance 100 basis points to a range of 13% to 14%, and net income growth 300 basis points to 33% to 35%.
Not only is Heico riding a wave of strong demand for aircraft products, it's also been able to tuck in acquisitions and steadily improve net margins for the business overall. That's how the company has beaten the market long term, and I don't see that trend slowing down in 2018.
