It’s easy to just go with the crowd and jump into Raytheon (NYSE:RTN) or Northrop Grumman (NYSE:NOC) when it comes to defense stocks.
There’s certainly nothing wrong with going with the top brand names and riding the wave of safety they offer. However, there are times I like to go with the smaller names in a sector because they may offer potentially much higher returns for the bit more risk they represent.
HEICO Corp. (NYSE:HEI) is one such smaller name, despite being in business for more than 60 years. The company began with a focus on replacement parts and repair services for commercial aviation. It then launched an acquisition binge in the 1990s, eventually gobbling up some 40 small businesses that specialized in various areas of aerospace and defense work.
HEICO’s Flight Support Group continues to provide aircraft replacement parts and specialty components for aerospace, with clients that include the U.S. government. This segment also distributes components for the commercial, regional, and general aviation markets, including avionics, instruments, composites and flight surfaces of commercial airlines.
Its Electronic Technologies segment provides a range of electronic, microwave and electro-optical products, none of which I’ll pretend to understand except that they involve “infrared simulation and test equipment, laser rangefinder receivers and high voltage interconnection devices.” This unit also tests systems for the military, defense contractors and commercial and defense satellite and spacecraft manufacturers.
So this is a defense play outside the view of most investors, which is why I find it attractive.
HEICO is sitting on $22 million in cash and $174 million in debt, most of which was drawn down to finance acquisitions, and for which no maturities hit until 2017. It traditionally generates around $100 million in free cash flow annually, giving the company the capital it needs to expand via acquisitions as well as organically. That growth is in the 14% range, as just reported in HEICO’s latest quarterly earnings announcement, on a 17% increase in sales, to a record $216 million.
Analysts are pegging long-term growth at a generous 18.63%. That suggests 2016 earnings of $3.69 per share. A 19x multiple would suggest a future stock value of $70.
Today’s share price is a mere $41. So while HEICO may be pricey on this year’s earnings, there’s possibly room to run going forward. Defense and aerospace will remain an important part of the American economy and the federal budget for some time to come, which makes the company an intriguing growth play.
Lawrence Meyers has no position in any companies mentioned.
