The Hot Defense Stock You’ve Never Heard Of
There is one business segment in the aerospace and defense sector that by itself is more profitable and better for earnings results than the manufacturing of hardware. It is maintenance, repair, and operations (MRO). Many of the major companies have such operations, but Heico Corp (NYSE:HEI) is a specialist. That’s what makes Heico stock so hot.
HEI stock has shown outstanding performance on three separate fronts: commercial services, defense applications, and advanced electronics design. Heico’s advantage is that, not only is it a defense stock, it has many civilian aspects as well.
Heico stock gained over 22% year-to-date. That growth is 34% compared to a year ago, and 78% for the five-year period. HEI stock is trading at $66.00, which is about $7.00 off of its record high of $74.00. Heico stock has benefited from the growing worldwide demand for MRO services.
Aerospace companies add revenue when they sell planes and related equipment. In the civilian market, airliners, engines, avionics, and interior equipment are the money-makers. In the military, fighter jets, engines, avionics, weapons, missiles, and drones are also popular items on procurement lists. But, these together need MRO services. That’s why HEI stock has seen such bullish growth.
Heico Corp Is a Top U.S. Defense Stock, but Its Reach is Global
Heico covers the whole range of MRO, from commercial replacement parts for planes (mechanical and electronic) to specialized manufacturing. It operates through two units: the “Flight Support Group” (FSG) and the “Electronic Technologies Group” (ETG). While the FSG focuses more on the strictly-maintenance side of the business, the ETG designs and builds components for all that the aerospace sector involves. Yes, that includes space exploration.
This wide diversification has benefited HEI stock shareholders. In the company’s last quarterly results—announced last August 24—Heico reported earnings of $0.62 earnings per share (EPS), which is better than the $0.59 that analysts had expected, while revenues grew 18.5% year-over-year. The consensus EPS guidance for the full year is $2.15.
The revenue picture was nicely rounded, as both the FSG and ETG segments showed organic growth, and analysts are setting price targets for HEI stock ranging from $75.00 to over $80.99 per share. The advantage for an MRO company like Heico over the larger players like Boeing Co (NYSE:BA) or Airbus, or even Lockheed Martin Corporation (NYSE:LMT), is that it can expect better margins, given the lower capitalization risks.
The Boeings of the world get paid on delivery, having to absorb the industrial costs up front. As an example, an airline’s MRO division can remain profitable even as its main passenger business suffers. Such was the case of Germany’s flagship carrier Lufthansa. The MRO division performs services for other airlines as well.
Heico Benefits from Growing Budgets in Commercial and Defense Sector
Increasing safety and efficiency concerns have expanded the scope and demand of MRO providers. Moreover, the continued growth of air travel demand over the next decade can only lead to more demand for MRO services. This is a field that, while competitive, allows for few new entrants, given the level of trust and reliability that airlines expect. So an established player like HEI stock is well placed to benefit from the growth.
The commercial aerospace sector is constantly breaking new records of production. The tougher emission regulations and the advantages to the bottom line from fuel savings have boosted the demand for new-generation aircraft. The sharp rise in passenger traffic in Asia-Pacific and the Middle East has contributed to this. More airplanes flying around the world means there’s more need to maintain them, creating revenue opportunities for Heico stock.
The defense sector also outsources maintenance, but Heico also participates in defense contracts as a manufacturer. In 2017, the defense sector could get a major boost. As we have often mentioned, the prospects for rising military confrontations are high, regardless of who will occupy the Oval Office in 2017. The U.S. Department of Defense’s (DoD) budget is widely expected to rise after several consecutive years of decline. Heico is already an approved and leading supplier of MRO services to the DoD.
Not only that, but Heico’s fast-growing ETG segment is a leading supplier of components used in commercial satellites, fighter jets and drones, to mention a few. Indeed, the geopolitical context, the rise of terrorist threats, and cybersecurity entail an increasing demand for such components, not just in the U.S., but also in other countries’ defense budgets. This bodes well for HEI stock.