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Heico Shares Lost 12% in the First Half of 2020. Here's Why That's Actually Not So Bad

By Lou Whiteman – Jul 6, 2020 at 12:27PM

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The COVID crisis hit Heico less than many of its peers.

What happened

Shares of Heico (HEI 1.56%) fell 12.7% in the first half of 2020, according to data provided by S&P Global Market Intelligence, as the aerospace component manufacturer was dragged down by the COVID-19 pandemic and its impact on airlines.

It could have been worse: Heico held up relatively well compared to Boeing (BA 1.78%) and even TransDigm Group (TDG 1.37%), which is often cited as Heico's best comparison. Those stocks were off 43% and 21%, respectively.

So what

Airlines have had a tough time managing through the pandemic, which has caused travel demand to plummet. Airlines are expected to report second-quarter revenue down 90% year over year, and with cash not coming through the door, the carriers have been forced to ground planes and put off expansion plans.

A plane receiving maintenance in a hangar.

Image source: Getty Images.

The airlines' cutting back is trickling down to commercial aerospace companies, and investors have mostly run for the exits. Heico, relative to many of its rivals, has had an easier time managing through the crisis, thanks to its variety of businesses. The company generates about half of its revenue from outside of commercial aerospace, including in defense, space, healthcare, and electronics.

Some of those businesses have been allowed to keep operating through the pandemic, and sales have remained strong. Heico, for example, makes components that go into CT scanners and other medical equipment, and many of its defense customers were exempted from forced closures.

Now what

Heico has held up well relative to other aerospace companies, but it will be hard for the stock to really soar until airlines are flying full schedules again. That could take a few years, and the upside for Heico is likely limited in the meantime.

Management believes Heico's aerospace business will come back faster than the broader aerospace market due to the company's focus on components that make flying more cost-effective. The argument is airlines need those sorts of components now more than ever, and will be willing to spend on parts with a quick return.

That remains to be seen, but in the meantime Heico can fall back on its noncommercial aerospace businesses to keep things stabilized. Relative to most of its peers, Heico -- thanks to its revenue diversity -- remains among the safest options for those interested in buying into commercial aerospace and waiting out the downturn.

Lou Whiteman owns shares of TransDigm Group. The Motley Fool owns shares of and recommends TransDigm Group. The Motley Fool recommends Heico. The Motley Fool has a disclosure policy.

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