This aerospace services company beat analysts’ earnings estimates by $.20 per share last quarter, and nine analysts have increased their forecasts for the company in the past 30 days.
HEICO (HEI)
From Canaccord Genuity Research
HEICO (HEI) reported Q1/18 EPS of $0.60, as compared to our estimate of $0.45. Note that the quarter included a ~$0.15 benefit from the TCJA of 2017 ($0.11 from onetime benefits, and $0.04 from the lower rate). Organic growth in the quarter was 5%, with total sales up 18% to $404M, and operating margins were an impressive 19.7%. The company raised its sales, earnings, FCF and operating margin guidance for FY18, which is stronger than we had anticipated.
We view the performance in the ETG as notably impressive, with total sales growth of 23% (6% organic) but with segment margins of 27.8%, compared to our estimate of 26.4%. We believe the margin contribution from the AAT acquisition is more impactful sooner than we expected, and we also believe the base defense business in the ETG segment is benefitting from the short-cycle spending increases.
Management also indicated that virtually all the margin performance in the ETG segment was at the gross line, which is encouraging for the full year outlook. The company has raised its full year ETG sales guidance to now up 15-17%, and it has pushed up its EBIT guidance to now 27-28%. Note the just completed Sensor Tech acquisition should contribute annual revenues of ~$5M.
Management was pleased with its 4% organic growth in the FSG segment. Note that the commercial AM organic growth in the segment was ~6% (virtually all volume), with the defense sales within FSG down in the quarter. The company is now looking at a H2/18 acceleration in its FSG defense sales. We continue to believe the strong aircraft utilization and passenger traffic will be a strong tailwind for the FSG segment, and the investment in older aircraft, and we believe organic growth will accelerate off the Q1/18 levels. Management did not raise its full year 2018 FSG guidance.
HEI increased its full year sales guidance to now up 12-14%, as compared to the previous guidance of up 10-12%. We view this increase on the sales outlook as conservative, considering the Q1/18 sales were up 18%. However, management increased its earnings guidance to now up 30-32%, which is much greater than we had expected. We believe about 10-12% of this is the lower tax rate (the new guidance calls for the combined tax and minority interest line to be 26-28%), but acquisitions and strength in the defense market are also positives. The company also increased its 2018 FCF guidance by $20M and its full year operating margin guidance by 50 bps.
We are impressed by the Q1/18 results, and we are maintaining our BUY rating and our $88 price target. We expect estimates to increase on the strong net income 2018 guidance.
Ken Herbert, Canaccord Genuity Research, www.canaccordgenuity.com, February 28, 2018