Shares of Heico (US:HEI), the world's largest independent manufacturer of FAA-approved jet engine and aircraft component replacement parts, dipped 5.5% in extended trading on Monday, despite the company's fiscal third-quarter results surpassing consensus expectations on both revenue and earnings per share fronts. 

HEI generated EPS of 74 cents, slightly ahead of the consensus figure of 73 cents, the latest earnings surprise, as illustrated in the chart below.

Heico's told investors that it generated 27% revenue growth over the year to $723 million, which beat consensus expectations of $702 million by 3%. This growth was fueled by a 23% year-on-year rise in Flight Support Group (FSG) sales to $405 million, marking the 12th-consecutive quarter of sequential top-line growth. 

The Electronic Technologies (ET) segment also witnessed a 33% year-on-year surge, driven by the Exxelia acquisition and organic growth in the commercial aero and other electronics end markets.

Not a Perfect Picture

However, the earnings were not picture perfect, with the company slightly missing EBITDA expectations of $182 million, coming in at $180 million. The miss was primarily due to $3.5 million of acquisition-related expenses. These costs, linked to the Wencor deal, dented the EPS by 3 cents, according to some analysts in the market. 

Furthermore, while the 19% organic revenue growth in FSG was robust, it signaled another quarter of deceleration, raising some investor eyebrows.

The group’s operating margins were also a mixed bag. The corporate operating margin of 20.7% was down 190 basis points YOY, largely due to weak ET margins. On the brighter side, FSG operating margins saw a 60 bps YOY increase, reaching 22%, thanks to improved gross profit and volume. However, these gains were somewhat offset by acquisition-related costs.

Free Cash Flow (FCF) was reported at $133.7 million, falling short of the consensus of $150 million. The company attributed this to increased outflows for working capital, which supported Heico's growing backlog. The chart below from Fintel’s financial metrics and ratios page for HEI shows a visual representation of underlying cash flows for the company over the last five years. 

The acquisition of Wencor, which closed on Aug. 15 for an aggregate transaction value of $2.05 billion, is expected to be a significant topic of discussion in this morning’s call at 9 am EDT. Investors and analysts will be keen to understand the go-forward financials, the expected synergies from the Wencor inclusion, and the current demand trends within the FSG segment.

Seeing Increase Parts Demand

Heico's long-term growth strategy hinges on higher aircraft deliveries, leading to increased parts demand. The company has successfully differentiated itself by offering superior component design and aligning its technology with major customer needs. Approximately 50% of Heico's sales cater to the Parts Manufacturer Approval (PMA) market, which represents a $1 billion addressable market.

However, the company's future isn't without challenges. There could be risks that stem from a prolonged economic slowdown, higher oil prices affecting air traffic growth, and a potential change in acquisition strategy. 

On the flip side, Heico's acquisitive history suggests potential upside risks, such as increased M&A activities, faster sales growth, and a stronger-than-anticipated commercial aero recovery.

What Analysts Are Saying

BofA Securities analyst Ronald Epstein said that Heico is continuing to experience significant gains from the commercial aerospace broader sector recovery and pointed toward its 12 months of consecutive sequential growth.

Epstein warned that weaker than expected margins could likely be negatively received by the market. BofA has a ‘neutral’ recommendation on the stock and a $220 target price.

Many analysts have target prices close to or above Fintel’s $185 consensus average price target, with valuations for most based around the 50x P/E multiple. While this valuation is usually deemed quite expensive in the street, it is only a slight premium vs the company's five-year historical forward P/E average of ~47x and the current peer group average of ~28x.

Strong Insider Trading

Data compiled by Fintel reveals the higher levels of insider trading activity in HEI stock. There have been 10 net insiders that have bought HEI shares over the last three months.

The platform gives HEI a high Officer Sentiment score of 85.54, which ranks the stock in 149th position when screened against 12,738 other global stocks.

In Tuesday’s call, the spotlight will likely be on ET margin performance, additional details on the Wencor acquisition, and potential future M&A strategies. Given the mixed results and high investor expectations, the stock might face some pressure. However, with Heico's track record and the commercial aerospace sector's recovery, the company remains a significant player in the aerospace aftermarket, and the future holds promise.