Acquisitions Drove Heico Corp.'s Growth in Q3

By Markets Fool.com

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The investments Heico Corp. (NYSE: HEI) has made to grow its business in the last year are starting to pay off for investors and will drive an expanding business in the future. Fiscal third-quarter results released after the market closed Wednesday show a sharp rise in top-line results, along with even better growth on the bottom line with organic growth across the company.

If Heico can translate recent acquisitions into developing new products that will drive future growth, it could continue the great momentum for investors. Here's a look at what you need to know.

Heico Corp. results: The raw numbers

Metric

Q3 2016 Actuals

Q3 2015 Actuals

Growth (YOY)

Sales

$356.1 million

$300.4 million

18.5%

Net income

$42.0 million

$34.4 million

22.2%

Earnings per share

$0.62

$0.51

21.6%

Data source: Heico Corp. earnings release. YOY = year over year.

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What happened with Heico Corp. this quarter?

The strong results you see above were driven by recent acquisitions, as I'll point out below. But there was also organic growth across the business, and management is investing in new products hoping that scale will lead to more growth in the future.

  • Flight support group sales jumped 8% to $222.6 million, helped by 4% organic growth. Operating income grew 7% to $42.0 million in the quarter.
  • Electronic technologies group sales rose 40% to $136.2 million, driven by acquisitions over the past year. But organic sales were up 1%, so there's some growth in the core business. Operating income also jumped 38% to $33.6 million, an impressive 24.7% operating margin.
  • Cash flow from operating activities from the first nine months of the fiscal year was up 42% to $172.4 million.
  • Debt did grow from $367.2 million at the beginning of the fiscal year to $509.6 million at the end of the third quarter. Most of that debt was used to fund acquisitions. It's notable that shares outstanding didn't jump significantly, so the growth that's been acquired recently has been done primarily with debt rather than the issuance of new shares.

What management had to say

Acquisitions could continue as part of the strategy, but don't be surprised if the buyout binge slows because debt has grown. Instead, management said it will focus on new product development, further market penetration, and maintaining financial strength.

Look for that strategy to take hold in the organic sales number going forward. Growth through acquisition can only last so long, and investors will want to see management effectively turning its new capabilities into sustainable growth opportunities.

Looking forward

Management said that fiscal 2016 net income is expected to grow 13% to 15%, up a percentage point from previous estimates. Better-than-expected growth in aviation aftermarket parts and specialty products has driven this year's results, and with commercial air travel growing worldwide, the trend will likely continue.

At the very least, it looks like a solid finish to fiscal 2016 is on the horizon, which should keep the stock trading near newly minted 52-week highs.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Heico. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.