This Little-Known Defense Contractor Crushes The S&P 6-To-1
Here at StreetAuthority, we repeatedly stress the importance of compounding. It’s the best way we know to leverage small investments into major gains — if you have the patience to ride them out over the long haul.
You’ll often find such opportunities among small cap stocks. According to Morningstar, small caps outperform large-caps by two percentage points per year over the long term.
One of my favorite compounders is Heico Corporation (NYSE: HEI), a mid-cap aerospace and defense company which has a compounding record that blows away its peer group. Over the past 20 years, this stock has delivered 22% annualized returns.
Heico operates two business segments: its Flight Support Group, with makes parts and components for aircraft accounts for roughly two-thirds of revenue; and its Electronic Technologies Group, which makes electrical components in the aviation, defense, and healthcare industries. Heico’s past success can be tied to a terrific management team, which has identified and successfully integrated a string of acquisitions.
Acquisitions are tough to get right. The Harvard Business Review notes that 70% to 90% of acquisitions fail to meet revenue and profitability targets that were laid out prior to the acquisition.
On Heico’s most recent quarterly conference call, CEO Larry Mendelson touted the company’s acquisition track record: “we have done over 50 acquisitions since this management took over. We have never had a failed acquisition. Some of them better than others, but we have never had a failed one. We are particularly careful in what we do…”
Heico has used its acquisitions to boost revenue at a rapid clip. Take a look:
Heico’s 10-year revenue growth rate is more than 18%. The company expects revenue growth of 10% this year, prior to the contemplation of any potential acquisitions. However Heico has said it is currently actively pursuing a number of additional deals that could bring revenue growth back to the 10-year rate.
Another example of Heico’s terrific leadership is its management of the balance sheet and share count. Companies that buy up other companies at this rate are usually heavily indebted or have to issue huge blocks of shares to pay for acquisitions. Heico’s balance sheet is terrific, with a debt to equity ratio of 0.42, and no long-term debt obligations due until 2018. That strong financial position will give Heico the firepower it needs to continue to add companies to its portfolio.
Heico’s share count discipline has also been a huge win for shareholders. Over the last 10 years, the number of shares on a split-adjusted basis has risen less than 1% per year.
On the surface, Heico doesn’t appear to be a terrific bargain. It trades at a 2015 price-to-earnings ratio of roughly 28. However, for a company that has grown revenue and earnings at an 18% annual pace over the last 10 years, and has trounced the S&P 500 over three, five, ten, and twenty-year time frames, Heico deserves to trade at a premium.
With a market-cap of under $4 billion dollars, Heico still has lots of growth ahead of it as it mixes acquisitions with organic sales and earnings growth. This company will continue to compound wealth for decades.
Risks to Consider: Heico is heavily dependent on airlines to buy replacement parts. A downturn in the economy that led to fewer flight miles would hurt the company. As a major supplier to defense contractors, government spending on defense will also play a role in determining how fast Heico can grow in the future.
Action To Take –> Heico is trading at a fair price near $54 per share. Investors who play to hold for decades and let compounding do its work would do well to buy shares today.
Want to know exactly when to buy stocks like Heico? Then you need StreetAuthority’s Maximum Profit system. It flags exactly which stocks are about to jump double, even triple digits in the coming days, weeks and months. Academic studies have shown that the indicator our system uses has consistently outperformed the market. To learn more, click here.