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Why Shares of Heico Fell Today

By Lou Whiteman - Mar 11, 2020 at 5:30PM

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Slumping travel demand could eat into growth for aerospace suppliers.

What happened

Shares of Heico (HEI 3.46%) fell nearly 10% on Wednesday on growing concerns the long commercial aerospace buying spree might soon be coming to an end. Airlines are adjusting flying plans to deal with the COVID-19 coronavirus outbreak, and that could mean the need for fewer planes in the future.

So what

Shares of aerospace component supplier Heico have had a remarkable run over the past decade, gaining more than 733% compared to the S&P 500's 139% gain, thanks to strong demand for Boeing (BA 5.64%) and Airbus (EADSY 2.96%) jets. Traditionally, commercial aerospace has been a cyclical business, and heading into 2020 there were warning signs that demand for larger aircraft might be waning.

Airplanes on the assembly line.

Image source: Getty Images.

The coronavirus outbreak could accelerate that decline, as airlines are facing evaporating near-term demand. Airlines have responded by cutting flights and grounding planes, and some major airlines have warned that if demand does not recover quickly, they could defer deliveries of airplanes on order.

Boeing said Wednesday it had 18 new orders in February and 46 cancellations. Should that trend continue, it would eat into profits for both Boeing and its suppliers.

Now what

Heico is a well-run company facing difficult macroeconomic conditions. The recent sell-off has cut into its premium valuation, with the company now trading at about 33 times earnings compared to more than 50 times earnings in January.

For those with a long time horizon, Heico is an intriguing stock to examine right now. But be advised the stock is unlikely to rebound until there is more clarity about the long-term impact of the coronavirus outbreak on airlines, and what it will mean for new plane demand.

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Stocks Mentioned

HEICO Corporation Stock Quote
HEICO Corporation
HEI
$132.00 (3.46%) $4.41
The Boeing Company Stock Quote
The Boeing Company
BA
$141.53 (5.64%) $7.56
Airbus Stock Quote
Airbus
EADSY
$24.64 (2.96%) $0.71

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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