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HEICO (HEI) Downgraded To 'Sector Perform' By RBC Capital, PT Cut To $39

 December 05, 2012 03:34 PM

(By Balaseshan) RBC Capital Markets analyst Rama Bondada downgraded rating of HEICO Corp. (NYSE: HEI) to "sector perform" from "outperform" and lowered price target to $39 from $45.

As entering the second half of this aerospace cycle Bondada expects a more tempered premium than HEICO's current 70% premium is justifiable for reasons: the company's premium at this stage of the past cycle, and the company's M&A strategy of purchasing lower multiple businesses.

The reasons also include HEICO's Net-debt-to EBITDA sits at about 1-time following its recently announced special dividend, and a lowered growth outlook over the next few years due to the increased sales mix of its non-aerospace businesses, the analyst noted. This has led him to lower his premium valuation bonus from 60% to 45% in our target price calculation.

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Despite the company's announcement that it is slightly levering up and paying out a special dividend ahead of anticipated tax rate increases, Bondada noted that in his view, HEICO is still under-levered.

The company does have a strong cash generation track record given the nature of its commercial aerospace business and this leads us to think that cash deployment (potentially another special dividend) could still be a method to increase growth and returns as the organic growth profile slows, the analyst noted.

The analyst noted HEICO stock is down about 10% so far this year (versus S&P500 up 12%), even after a mini-rally to price in its upcoming $1.14 special dividend that it will payout later this month.

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Bondada expects the leading cause of this underperformance is the company's acquisitions of non-aerospace businesses in areas such as General Industrials, Defense and Medical, areas that are not its core competency or that have a slower growth outlook (European general industrials, defense).

Entry into these areas were followed by repeated write-downs, which has brought up questions in regards to HEICO's previously near stellar operational track record, the analyst noted.

In Bondada's view, the company's bread and butter is commercial aerospace aftermarket and the main driver in the view of many investors. As it dilutes its mix away from this arena he thinks the company could see its premium multiple slowly dwindle.

HEI is trading down 2.05% at $41.49 on Wednesday.



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