Aerospace, defense, and electronics company HEICO (NYSE:HEI) (NYSE:HEIA) focuses on underserved niche markets and markets where the company is either a leader or could become one. As last night's earnings announcement shows, it's a winning strategy.

Net sales for the second quarter shot up 27% and net income soared (well, it is an aerospace company) by 39% compared with the same quarter last year. Six-month results look just as healthy, with net sales up 25% and net income leaping 38%.

Comprising 69% of total sales, HEICO Flight Support Group, a supplier of FAA-approved replacement parts for jet engines and aircraft components, increased its sales 22%. That growth was entirely organic, fueled by new products and the continuing recovery in the airline industry.

Electronic Technologies (31% of total sales) manufactures a variety of commercial and military products and repairs aircraft electronic equipment. Although sales in the latest quarter were up 39% over the comparable quarter last year, only 9% was organic growth. Acquisitions like Connectronics, a producer of specialty high-voltage interconnection devices and wire, accounted for the remaining sales gain.

The combined corporation saw operating margins increase from 15.5% in the year-ago quarter to 17.1% this quarter. Fatter margins support the company's projection of $32 million in free cash flow (that's cash from operating activities minus capital expenditures) in fiscal 2005.

The company raised earnings guidance for the year by a penny, to between $0.84 and $0.86 a share. That's a sharp increase from the $0.70 (excluding one-time events) earned last fiscal year, and analysts expect the company to earn $0.98 a share in fiscal year ending October 2006, valuing the stock at a somewhat rich 21.8 times forward earnings.

While operating results are solid and the balance sheet is improving, the company's list of strategic replacement-parts partners include such downright shaky names as Delta Air Lines (NYSE:DAL), American Airlines, and United Airlines.

That said, the company has proven that it can grow profitably through acquisitions, which could continue to prove that current earnings estimates are a bit light. For this observer, though, the good news is out, and the stock's premium price is too rich for such a volatile market segment.

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Fool contributor W.D. Crotty does not owns shares of any company mentioned. Click here to see the Motley Fool's disclosure policy.