While major companies such as Lockheed Martin (LMT -0.18%) and Boeing (BA 0.54%) have hogged much of the financial spotlight in the aerospace and defense sectors, they have been outdone by smaller rivals boasting impressive growth records. Heico (HEI -0.11%), a Florida-based aerospace company with a market cap of $16.55 billion, recently reported its Q3 financial results to shareholders, which handily beat analyst estimates.
Heico's past performance
As one of the most impressive aerospace companies in the market right now, Heico has garnered a reputation as a hot stock for good reason. In 2019, Heico's stock has surged by 89.3%, far outperforming the S&P 500 which is up only 15% during the same period. It's even trouncing well-performing industry benchmarks, such as the iShares Dow Jones US Aerospace & Defense ETF which is up just 25.8% so far this year.
Heico's rise to prominence isn't a new phenomenon either. Since the 1990s, it has seen a 24.3% compounded average growth rate (CAGR). A $10 investment in the stock in 1990 would have grown to more than $5,100 in returns by August 2019. The stock is now trading at a high premium, around 34 times enterprise value to EBITDA, a rather high multiple compared to peer aerospace stock TransDigm, which trades at 19 times its enterprise value to EBITDA. However, growth investors know having to pay up a high sticker price is common for high performing growth stocks like Heico.
How Heico will keep soaring
This quarter's earnings per share rose by 20% to 59 cents, beating analyst expectations at only 53 cents. Revenue rose by 14% to $532.3 million, again beating the $514 million anticipated by Wall Street. Management estimates for future financial figures were raised across the board as well. The company's full-year sales growth estimate was raised to 15% from the earlier 13% and net income growth is supposed to rise to 24% rather than its previous projection of 18%.
"Business conditions and end markets we serve continue to be strong. While we haven't completed our budgeting forecast and process for next year, current business conditions at Heico remain excellent. I mentioned in the last call that I had never seen business condition stronger and that has followed through in the third quarter and we are very optimistic for the future," said Heico Chairman and CEO Laurans A. Mendelson in the company's earnings call with shareholders.
The bulk of Heico's revenue in recent years has come from commercial aircraft, but it also supplies parts to Lockheed Martin's F-16 fighter jet and Boeing's F-15 fighter planes. Both aircraft are among the top-selling fighters in the world. With the U.S. military continuing to increase demand for these fighters, Heico remains well-positioned to take advantage of this tailwind.
While shares rose mildly in response to the earnings news, prices ended up falling on Wednesday after the company confirmed it's open to issuing new shares to facilitate future acquisitions. Heico has had an aggressive policy when it comes to M&A opportunities but has frequently used stock instead of cash as payment. While Mendelson added in the conference call that there are a number of advantages to using cash, he said Heico would be open to more stock-based acquisitions in the future. Issuing new shares generally causes stock prices to fall as investors fear dilution, but it's an alluring option for companies with shares selling at high multiples.
How long will the growth last?
The main question investors need to ask right now is how long will Heico continue to grow at its current rate? Growth stocks inevitably slow down once they mature, and Heico is already a mid-cap stock by conventional standards. When compared to legacy companies in the industry like Lockheed Martin, which has a $107.6 billion market cap, it does seem like Heico will slow down sometime in the future. But the stock has at least one if not two more years of strong growth on the horizon before its growth begins to temper. However, whether they buy now or in the future, growth investors would be hard-pressed to find a more attractive aerospace stock then Heico.