Update: HEICO (HEI / HEI.A)

HEICO reported Q2 F2025 results (FYE October). Class A shares were up 8%. HEICO delivered 15% sales growth and 19% EBIT growth led by 24% sales growth in FSG (14% organic). I think HEICO Class A shares are fair value to slightly cheap using conservative M&A redeployment assumptions, even at the higher price of $233/share. I walk through my assumptions later.

Key Highlights

• This was HEICO's first call without Larry Mendelson on the line. Victor took on Larry's old role on the call and did the high level results summary whereas Eric went over both ETG and FSG results. It suggests to me that the approach is to run ETG and FSG together as brothers versus having separate focus areas. For example, in the Q&A they mentioned they both attended an Aerospace industry conference.
• Very strong 14% organic growth performance in FSG. Ok 4% organic growth performance in ETG. Overall EBITA margins are flat and should improve over time, especially if ETG starts recovering in H2 F2025. Given the delays in the 737 max, LEAP and P&W 4000 confounded by supply chain issues, we are likely to see elevated FSG organic growth for the next 2 to 3 years, perhaps low-teens (versus my LT assumption of 7%)
• I was probably too worried about defense as I wasn't taking into account the defense exposure within FSG. The FSG portion of defense grew 18% organically and represents half of overall defense exposure. The DoD is embracing PMA parts to save on costs.
• HEICO implied they were busy with M&A. YTD M&A spend at $290 is already almost enough to meet my 50% of FCF redeployed (I estimate roughly $650m in FCF in FY2025) and leverage stands at <1.9x so plenty of firepower.
• Completed acquisition of Rosen Aviation in the quarter (terms not disclosed) which manufactures cabin displays and control panels.