HEICO: Watch Out for the Cliff!

HEICO Corporation (HEI - Snapshot Report) reported Q1-09 results. Net Sales declined by 2.9% to $130.4 million. Operating Income dropped 7.6% to $21.5 million, as the Company increased R&D expenditures by about 15% to $4.8 million.

However, aided by a reduction in Interest Expense, Pre-Tax Income was only off by 4.7% to $21.2 million. Income before Minority Interests, on the other hand, was up by 4.6% to $15.4 million. The reason: the Tax Rate dropped from 34.1% to 27.6% because of the (positive to HEI) completion of an IRS audit of the Company’s R&D Tax Credit claims for fiscal ’02 through ’05.

When the lower Tax Rate was coupled with a decline in Minority Interests’ Share of Income, Net Income climbed by 12.2% to $11.3 million. EPS of 42¢ were 13.5% higher than the 37¢ reported last year. However, the lower Tax Rate added 4¢ to EPS, without which EPS would have been 38¢ (we were looking for 39¢), nearly flat.

Because HEICO develops generic (read: less-expensive) parts which can be substituted for parts from the original equipment manufacturers (OEMs), it generally gains market share during an economic downturn. For that reason, HEICO is targeting bringing some 500 new generic parts to market during fiscal 2009 as compared to approximately 400 last fiscal year.

The question is: Will the rise in the number of parts offered by HEICO offset a decline in the overall demand for the totality of parts needed to perform maintenance, repair and overall (MRO)? During the 1st quarter -- when new parts developed last year by HEI were available -- the answer was: No!

HEICO is now prognosticating that, given a possible global airline capacity reduction of 0% to 5% and a forecasted MRO spending reduction of 5% to 10%, HEI’s Net Income for Fiscal ’09 will be flat on a Net Sales decline of 0% to 5%. Further, the 3rd and 4th quarters will probably be better than the 1st and 2nd quarters, as MRO activity usually picks up during those periods.

As visibility is "opaque," Zacks' current opinion on HEI is Sell.