Heico shares with the biggest decline since 2022 📉

Shares of the manufacturer of spare parts and critical electronic components used in the aerospace, military and aerospace sectors, Heico (HEI.US), are losing nearly 20% from their October peaks.

• The decline is taking place despite a lack of significant news to justify the drop in sentiment. Currently, the stock is trading at a premium of about 20% to the average purchase price of Berkshire Hathaway, which bought a stake in the family-owned company by entering the shareholding. 
• In part, we can attribute the pullback in the stock to short-term weakness in defense and related companies. Perhaps, investors may be analysing the extent to which Trump's policies will affect defense contracts and budget spending.
• Heico forecasts continued sales growth in 2025, both organically and supported by acquisitions. The strategy is to grow products and take advantage of acquisition opportunities, while maintaining financial stability.
• Despite that, in FY 2025 Heico reported revenues of $1.01 billion, up 8.2% YoY,  almost 2% below analysts expectations by almost 2% Little bit lower organic revenue and adjusted operating income pressured high-valued Heico shares.

Solid financial results for Q4 2024

The financial results for Q4 of fiscal 2024, however, performed very well, and aside from a slowdown in the defence  segment, there are no signs of any alarm. 

• Net income in the fourth quarter of fiscal 2024 rose 35% to $139.7 million ($0.99 per share), compared with $103.4 million ($0.74 per share) in the fourth quarter of 2023.
• Net income for the full year 2024 rose 27% to $514.1 million ($3.67) from $403.6 million ($2.91 per share) in 2023.
• Revenue in the fourth quarter rose 8% to a record $1.013 billion from $936.4 million a year earlier. For the full fiscal year, they rose 30% to $3.857 billion from $2.968 billion in 2023.
• Operating margin rose to 21.6% in the fourth quarter (from 20.2%), and for the full year to 21.4% (from 21.1%). EBITDA rose 13% to $264 million in the fourth quarter and 32% to $1.002 billion for the full fiscal year.

Flight Support Group reported a 15% increase in sales, up 49% for the full fiscal 2024. Organic growth was 12%. Heico reported its 17th consecutive quarter of net sales growth. 

• Operating income in the fourth quarter rose 35% to $154.5 million, and for the full fiscal year rose 53% to $593.1 million. Fourth-quarter operating margin rose to 22.3% (from 19%), and for the full year to 22.5% (from 21.9%).
• Electronic Technologies Group; Q4 group revenue fell 1.8% to $336.2 million (mainly due to lower orders in the defense segment), but for the full year rose 3% to $1.263 billion.
• Operating income in the fourth quarter fell 5% to $81.8 million, but for the full year rose 1% to $288.2 million. Fourth-quarter operating margin was 24.3% (down from 25.2%), and for the full year was 22.8% (down from 23.3%).

At the same time, the record order backlog indicates an optimistic growth outlook in the space and defence segment for 2025.

1. Heico acquired a total of four companies in 2024, including Capewell Aerial Systems and Marway Power Solutions, supporting earnings growth. The company expects acquisitions to improve earnings in 2025. Debt to net income declined in 2024, and the debt to EBITDA ratio fell by as much as 50% in 2024.
2. Cash flow from operations rose 39% in the fourth quarter and 50% for the full year. The company announced a semi-annual dividend of $0.11 per share. It was the 93rd consecutive dividend since 1979.

Heico Corp (HEI.US) shares D1 chart

The company's shares are testing the 23.6 Fibonacci retracement of the 2020 upward wave. The current scale of the sell-off is 1:1 similar to that of the April-July 2022 period. Historically, pullbacks of 20% or more in the company's shares have been extremely rare.

Source: xStation5

Heico's valuation is relatively challenging, but annual net profit growth was 27%, which, combined with the company's wide moat, partially justifies the 'high valuation'. The company remains a key supplier of OEM replacements, i.e., electronic components and parts to the U.S. military, space sector and aerospace concerns; particularly Boeing.

Source: XTB Research, Bloomberg Finance L.P.

Source: XTB Research, Bloomberg Finance L.P.