Aerospace component and electronics supplier HEICO (HEI, Financial) saw its shares rally by about 8% ahead of its Q3 earnings report, reflecting high market expectations. The company benefited from strong demand for its commercial aviation and defense products, as well as contributions from recent acquisitions. HEI achieved record quarterly operating results in its Flight Support Group (FSG) segment, surpassing Q3 EPS estimates. However, a 37% increase in total revenue only met analysts' expectations, leading to some disappointment and a sell-the-news reaction.
- The resurgence of travel demand in the commercial airline industry and increasing defense budgets are key factors boosting aerospace parts suppliers. Recent IPO Loar Holdings (LOAR, Financial) posted an impressive beat-and-raise Q2 report on August 13, following GE Aerospace's (GE, Financial) strong Q2 results on July 23. These performances set high expectations for HEI.
- In Q3, the FSG segment was the highlight, with revenue and operating income increasing by 68% and 72%, respectively. On an organic basis, net sales rose 15%, driven by strength in the aftermarket replacement parts product line. Acquisitions, especially the $2.05 billion acquisition of Wencor Group (closed 8/4/23), significantly contributed to HEI's growth.
- The addition of Wencor Group diversified HEI's aftermarket product line, adding generic parts like bearings, seals, and gears. HEI continues to operate Wencor as a standalone entity and reports that Wencor's performance has exceeded expectations.
- HEI's Electronic Technologies Group (ETG) saw a 1.1% revenue dip to $322.1 million, mainly due to a decrease in electronics and medical products, partially offset by higher aerospace, defense, and space product sales. Despite inventory destocking at some customers, HEI believes order trends have bottomed and is seeing improved orders from some companies.
Looking ahead, HEI is optimistic about achieving net sales growth in both segments in FY24. The company also indicates a robust acquisition pipeline with opportunities in both the FSG and ETG segments.
