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Why Heico Stock Just Dropped 5%

By Rich Smith – Aug 26, 2020 at 1:17PM

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Sales and earnings beat estimates but are still down severely from a year ago.

What happened

Airplane-parts supplier Heico (HEI 2.58%) was the absolute best-performing aerospace and defense stock of the past decade, returning more than 1,200% from the start of 2010 to the beginning of 2020 -- but it's giving back some of those gains today -- down about 5.6% as of 12:45 p.m. EDT despite "beating earnings" in last night's report.

Tuesday after close of trading, Heico said it earned $0.40 per share on $386.4 million in revenue in its fiscal Q3 2020, beating Street expectations for $0.32 in profits on $384.5 million in revenue. 

Glowing red stock chart arrow trending down

Image source: Getty Images.

So what

That's the good news. Now here's the bad. Sales for this fiscal third quarter declined 27% year over year and net income fell 32%. Results for the fiscal year to date aren't quite as dire -- sales down only 10% and profit actually up 4% year over year -- but even so, the third quarter was clearly a tough row to hoe.

Explaining the declines, Heico CEO Laurans Mendelson observed that:

[T]he COVID-19 outbreak ... caused significant volatility and a substantial decline in value across global markets. Most notably, the commercial aerospace industry experienced an ongoing substantial decline in demand resulting from a significant number of aircraft in the global fleet being grounded during our third quarter. As such, our commercial aerospace businesses were materially impacted in the third quarter of fiscal 2020 by the significant decline in global commercial air travel that began in March 2020.

Now what

This won't be true forever. Mendelson predicts that "once commercial air travel resumes, cost savings will most likely be a priority for our commercial aviation customers and we anticipate recovery in demand for our commercial aviation products, which frequently provide aircraft operators with significant savings."

In the meantime, the CEO reassured investors that Heico will remain cash flow positive through the end of this fiscal year, at least. So long as profits keep going down, not up, however, aerospace investors may remain nervous about owning Heico stock.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Heico. The Motley Fool has a disclosure policy.

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