HEICO Corporation had a strong fiscal third quarter (Q3) as its revenue rose 27% to a record $722.9 million and operating income increased 16% to $149.4 million, all prior to its acquisition of Wencor Group in early August.
With net income rising 24% to $102 million, earnings-per-share (EPS) jumped to $0.74 compared to $0.60 on a profit of $82.5 million a year earlier.
In an Aug. 28 press release, HEICO highlighted the performance of its Flight Support Group in its fiscal Q3 ended July 31. “These results principally reflect robust 19% quarterly organic net sales growth mainly driven by our commercial aerospace parts and services,” Eric Mendelson, HEICO’s co-president and president of HEICO’s Flight Support Group, said.
Noting that the Flight Support Group has now achieved twelve consecutive quarters of growth in net sales, he added that “these numbers don’t yet include the positive impact we expect from the Wencor acquisition.”
Earlier in August, HEICO announced it had completed the acquisition of aftermarket company Wencor Group (now part of HEICO’s Flight Support Group) from affiliates of Warburg Pincus and Wencor’s management for $2.05 billion: $1.9 billion in cash and $150 million in HEICO Class A Common Stock paid at closing. The transaction is HEICO’s largest ever in terms of purchase price, revenue and income acquired.
Founded in 1955, Wencor is a large commercial and military aircraft aftermarket company. In addition to offering aircraft and engine accessor component repair overhaul services, Wencor provides factory-new FAA-approved aircraft replacement parts as well as value-added distribution of high-use commercial and military aftermarket parts. Wencor’s parts and repairs are found in hydraulic, pneumatic, electronic and electro-mechanical, cockpit and galley systems throughout different aircraft models.
HEICO is bullish on Wencor’s potential to buoy earnings. In an Aug. 4 press release, the Hollywood, Florida-based aerospace and electronics company said that Wencor is currently exceeding expectations that it would generate roughly $153 million in earnings before interest, taxes, depreciation and amortization (EBITDA), respectively, in 2023.
HEICO’s acquisition of Wencor is timely given the increasing prevalence of alternative parts used by airlines and aircraft repair shops, a trend that has occurred amid supply chain travails that have adversely affected branded parts.
In May, Mendelson told Reuters that Wencor’s product line would be complementary to HEICO’s, citing as an example its strength in bearings—a part that HEICO doesn’t manufacture.
It remains to be seen if investors will be as excited about the acquisition as HEICO’s leadership. They initially reacted tepidly to HEICO’s better-than-expected earnings in the May-July quarter. Shares were down more than 5% in after-hours trading on Aug. 28, though overall in the five days to Aug. 31, they have risen 1.82% to $168.52.
Robert Stallard of Vertical Research Partners wrote in an Aug. 29 note to clients that “investors had been expecting more from HEICO this quarter,” noting the “high bar” set by its counterparts in the aerospace and defense aftermarket.
Of the Wencor acquisition, he pointed out that “since it is still early days ... HEICO is wary of giving a hard target for future synergies.” That said, customers approve of Wencor’s complementary portfolio and the company’s MRO capacity “should be beneficial to HEICO’s combined offering in repairs,” he added.
For their part, analysts Ken Herbert and Stephen Strackhouse of RBC Capital Markets sounded slightly more sanguine in their assessment of HEICO’s performance in the June quarter. “We remain optimistic on the near-term AM [aftermarket] outlook, and see the demand for alternative parts holding up,” they said in an Aug. 29 note to clients, adding that since HEICO’s earnings estimates for the 2024 financial year “fully reflect the Wencor acquisition, the stock will benefit from potential positive estimate revisions and de-leveraging.”
