Heico HEI will report its fourth quarter financial performance after the closing bell on Monday, December 16. The aerospace giant has seen its shares soar over 59% in 2019, easily outpacing the S&P 500’s 24% run.
Despite its strong YTD run, the stock has been relatively stagnant lately and is down about 2% in the past 12 weeks. Heico is coming off a third quarter performance where both of its top and bottom-lines beat our Zacks consensus estimates.
Let’s take a look at how the company might close out fiscal 2019.
Growth Continues in Q3
The growth that Heico has seen has made it one of the standout growth stocks within the aerospace sector, which has outpaced the broader market over the past 10 years.
While Heico doesn’t build the planes we fly in like Boeing BA, the company is a critical component manufacturer in commercial aerospace, defense, and space. Heico has also capitalized on its growth by steadily expanding its business through small acquisitions over the years.
Heico saw its net revenue grow about 14% to $532.3 million and its bottom-line rose over 20% to $0.59 per share in Q3.
Heico had completed seven acquisitions in 2019 through the end of Q3. This should bode well for Heico as management has shown the ability to incorporate acquisitions well and expand margins. Despite the robust third quarter, Heico shares fell after the company confirmed that it is open to issuing new shares to help facilitate future acquisitions.
Heico has employed an aggressive policy when it comes to M&A opportunities, but it has often used stock instead of cash payments. Issuing new shares usually causes stock prices to fall as investors fear dilution. However, issuing new shares could actually be a beneficial thing for the company as it could drive its price to a more buyer friendly level.
Heico has reaped the benefits of the overall growth in the aerospace sector and CEO Laurans Mendelson, sees more growth ahead. “I mentioned in the last call that I had never seen business conditions stronger and that has followed through in the third quarter and we are very optimistic for the future,” he said on its Q3 earnings call.
The immediate future does look good for Heico, as it generates the bulk of its revenue from commercial aircraft, which has seen strong demand. The company also supplies parts to Lockheed Martin’s LMT F-16 fighter jet and Boeing’s F-15 fighter planes, which are among the top selling fighter planes in the world. With the US continuing to increase its demand for these fighters, Heico is in a good position to cash in on the increase defense spending.
Our Q4 Zacks consensus estimates call for earnings to climb 16.3% to $0.57 per share and for net sales to rise 11.1% to $529.78 million.
Flight Support Group sales are projected to rally 7.5% to $312 million and the segment’s operating income is anticipated to grow around 18% to $64.5 million. Meanwhile, Electric Technologies are forecasted to generate $212 million and its operating income is predicted to grow 10.8% to $63.3 million.
While Heico’s top and bottom-lines still look solid for the upcoming quarter, it does mark a slight slowdown for the growth it saw in the third quarter.
Heico has put together a strong year through its robust top and bottom-line gains and with the way the aerospace industry is growing, Heico looks poised to continue its run. However, investors are forced to pay for the firm’s growth upfront as the stock currently trades for about 48.5X its forward earnings compared to the industry average of 22.4X.
If management were to issue new shares in its M&A endeavors, it could potentially provide a solid entry point for investors looking to get into the booming sector, as it would likely send the stock price down. HEI stock sits at a Zacks Rank #3 (Hold) with a Styles Score of A in Growth.
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