Neutral on Small-Cap HEICO

Maintenance, repair and overhaul (MRO) of both commercial and military equipment is at a heightened level because of increased usage, which engenders a vibrant aftermarket. In addition, rising fuel costs are forcing the airlines to find ways to cut other expenses. Both of these drivers offer significant opportunities for HEICO Corp. (HEI - Snapshot Report) to expand & flourish.

However, while robust levels of revenues and income are envisioned for HEI over the balance of the decade, we believe that HEI is close to fairly valued at current levels, and therefore have maintained our strong HOLD opinion. Aside from original equipment manufacturers (OEM) and their subcontractors/suppliers, HEICO purportedly is the world's largest independent manufacturer of jet engine and aircraft component replacement parts approved for use by the Federal Aviation Administration (FAA).

HEI has the highest P/E ratio and the highest PEG ratio of the aerospace/defense supplier group. One of the reasons that investors are willing to pay up for HEI may be that (at least) two of its principal clients Lufthansa and American Airlines (AMR - Snapshot Report) have equity investments in the company, which would indicate that HEI has secured some pretty powerful clients. (witness the $76.0 million of Minority Interests on the Balance Sheet).

On the other hand, HEI has a Goodwill-to-Equity ratio of 0.81, which we find bothersome. Further, the current economic malaise may keep even well-positioned stocks like HEI from rising.

Read the full analyst report on HEI.