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Friday, 22 September 2006
September 22, 2006 HEICO (HEI)

 

CLICK HERE TO GET TO MY PODOMATIC PAGE FOR MY PODCAST. 

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisors prior to making any investment decisions based on information on this website.

Even though the overall market tone is poor today, I wanted to see if I could find another stock to discuss with all of you readers.  When investing, it is helpful to build a portfolio of stocks.  But it is always the challenge of deciding which stocks are best to be owning within that portfolio.  I hope that these discussions are helpful to you in making your own decisions about possible stock selections.  But do consult with professional advisors as well.

Over the years, I have employed a stock-picking system that starts with an examination of the top % gainers that day on the NYSE, the NASDAQ, and sometimes the AMEX as well.  Looking through the list of top % gainers on the NYSE today, I came across HEICO Corporation (HEI) which as I write is trading at $34.53, up $1.13 or 3.38% on the day.  Often this low a % gain is not sufficient for a stock to make the top % gainers list.  However, on a declining day, it suffices.

I do not own any shares nor do I have any options on this stock.  However, I reviewed the things I have found important on an investment and believe that this is a stock that deserves a spot on my blog!  Let me share with you the factors that led me to this decision. 

1. Was there any news that led the stock to move higher today? 

Reviewing the news on the stock, I saw that Sun Trust Robinson Humphrey had raised its opinion on HEI from "neutral" to buy. This apparently was enough to push the stock higher today.

2. What exactly does this company do? 

 According to the Yahoo "Profile" on HEICO, the company

"... through its subsidiaries, engages in the design, manufacture, and sale of aerospace, defense, and electronics related products and services in the United States and internationally. It operates in two segments, Flight Support Group and Electronic Technologies Group."

3. How did they do in the latest quarter? 

On August 30, 2006, HEI reported 3rd quarter 2006 results.   Net sales for the quarter ended July 31, 2006, increased 48% to $102.1 million, up from $69.2 million in the same quarter last year. Net income came in at $8.28 million,  up 37% from $6.05 million, or $.31/diluted share, up from $.23/diluted share in the same period last year.  In light of these strong results, the company went ahead and raised guidance on the full year to $378 to $380 million in revenue (up from $370 to $376 million guidance provided in June), $66 to $67 million in operating income, and net income in a range from $1.14 to $1.16/share (up from the $1.09 to $1.12/share guidance in June) . The current quarter's net income exceeded by $.03/share the $.28/share expected by analysts.  The revenue figure also exceeded the $92.5 million expected by analysts polled by Thomson Financial.  

In my slang, I call this a 'trifecta-plus'.  That is, the company reported strong revenue AND earnings growth, beat expectations and raised guidance.  The best that can be expected from a quarterly report imho.

4. What about longer-term financial results? 

Looking at the "5-Yr Restated" financials on HEI from Morningstar.com, we can see the steady growth in revenue from $171.3 million in 2001 to $269.6 million in 2005 and $325.9 million in the trailing twelve months (TTM).

Earnings, however, have been a little less consistent, dropping from $.65/share in 2001 to $.50/share in 2003.  However, since 2003, earnings have steadily increased to $.87/share in 2005 and $1.02 in the TTM.

The company also pays a small dividend, with $.05/share paid in 2001 through 2005, and $.07/share paid in the TTM.

The number of shares outstanding has been relatively stable, increasing from 22 million in 2001 to 25 million in 2005 and the TTM.

Free cash flow has been positive with $24 million in 2003, $28 million in 2005 and $22 million in the TTM.

The balance sheet as presented by Morningstar.com appears solid with $5.4 million in casha nd $152 million in 'other current assets'.  This total of $157.4  million can easily cover the $45.1 million of current assets and cover most of the long-term liabilities which are reported at $151.5 million.  the current ratio works out to a 'healthy' 3.49.

 5. What about some 'valuation' numbers on this stock?

Referring to Yahoo "Key Statistics" on HEICO, we can see that this is a mid-cap stock with a market capitalization of $865.60 million.  The trailing p/e is a moderate 31.05, and the forward p/e is estimated (fye 31-Oct-07) at a nicer 24.77.  The PEG is a tad rich at 1.51.

According to the Fidelity.com eresearch website on HEICO, this company is in the "Aerospace/Defense-Products/Services" industrial group.  Within this group, HEI is relatively richly priced relative to the Price/Sales ratio which tops the group at 2.5.  Also at 2.5 is Rockwell Collins (COL) at 2.5, Honeywell (HON) follows at 1.1, Goodrich (GR) at 0.9, Lockheed Martin (LMT) at 0.9, and Northrop Grumman (NOC) at 0.8.

Insofar as profitability is concerned, utilizing the Return on Equity (ROE) as a measure, HEI also comes in low at 10.1%.  This only is better than Northrop at 8.4%.  Leading the group is Rockwell at 42.8%, Lockheed Martin at 27.8%, Goodrich at 24.3%, honeywell at 17%, followed by HEI at 10.1% and Northrop at 8.4%.

Even though these numbers do not particularly show this company to be a great 'value', the strong revenue and earnings growth just reported suggests that investors are looking beyond these 'static' numbers which are about valuation based on current performance, but are pricing into this stock future earnings and revenue expectations.

Returning to Yahoo for a few more numbers, we find that  there are 25.32 million shares outstanding with 16.12 million that float.  Now here is the interesting piece of information.  Yahoo is reporting, as of 8/10/06, 2.40 million shares out short, up from 2.14 million the prior month.  With the average volume of only 119.6 thousand shares, this represents a whopping 21.4 trading days of volume out short.  It is no surprise to me, as I use a '3-day rule' to assess current ratios, that with the good earnings news this past week or so, the company has rallied strongly, likely both from investors buying shares for the first time as well as speculators covering their bad 'bet'.

As noted above, the company is paying a small (but increased) dividend of $.08/share yielding 0.20%  The last stock split was reported January 2, 2004, when the stock had an 11:10 split.  (what most people would refer to as a 10% stock dividend).

6. What does the chart look like?

If we take a look at the "Point & Figure" chart from StockCharts.com on HEICO, we can see that the stock was actually declining between January, 2001 when the stock was at $16, and when it bottomed in April, 2003 at $7.00.  (This corresponds with the drop in earnings during that same period....once again re-emphasizing the correlation between earnings performance and stock price performance imho.).  After breaking through resistance at the $11.50 level in June, 2003, the stock has subsequently traded higher to its current level near $35. 


7. Summary: What do I think about this stock?

In conclusion, I find HEICO to be an interesting stock pick for this blog.  They are a relatively small sized company (mid cap to be precise) with relatively few shares outstanding.  They just reported great results beating expectation on both revenue and earnings and guided analysts higher for the next quarter.  The Morningstar.com fundamentals look nice with steady revenue growth, steady earnings growth for the last 3 years, positive free cash flow, and a solid balance sheet.  Valuation-wise the PEG is at 1.5, the Price/Sales and ROE are a bit rich.  An interesting footnote is the large number of shares out short.  We may well be watching a continued slow 'squeeze' of the short-sellers.  Finally, the chart looks nice.

What I haven't told you is my familiarity with the product.  What I call the "Peter Lynch" portion of my analysis.  I am not familiar with their products but like the stock due to the underlying performance of the company.

Thanks so much for stopping by and visiting my blog!  If you have any comments or questions, please feel free to leave them on the website or email me at bobsadviceforstocks@lycos.com.  Also, please be sure to drop by and visit my Stock Picks Podcast Website where  you can hear me as well as read what I write!

Bob

 

 

 

 


Posted by bobsadviceforstocks at 2:37 PM CDT | Post Comment | Permalink
Updated: Sunday, 24 September 2006 6:20 PM CDT

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