Buffet Purchases Additional Shares of this Confidential Success, Which Has Increased by 51% in 2024; Worthy of Investment Consideration?
It's safe to say that most investors, even those frequently consuming financial news, were probably unacquainted with Heico (HEI 0.96%) until recently. This specialized industrial components manufacturer has been in operation for decades, operating in an unglamorous sector and generating little attention-grabbing headlines.
However, it has shown impressive performance at times, making it a favourite among investors like Warren Buffett. Buffett's interest in Heico was cemented when Berkshire Hathaway first acquired a stake in the company earlier this year. Recently, Berkshire increased its holdings in Heico even further. Let's examine whether it's wise for us to follow Buffett's lead and invest in Heico's shares.
A stealth performer that flew under the radar
Heico's genesis can be traced back to the late 1950s. The modern company comprised of two divisions: the larger flight support group (FSG) and the electronic technologies group (ETG). The FSG focuses on offering aftermarket parts and services for various types of aircraft, while ETG supplies electronic components to a wide range of clients in sectors such as space and defense.
During the trailing-12-month period ending in this year's third quarter, FSG generated 67% of Heico's $3.8 billion in revenue. Half of that revenue came from the commercial aviation sector.
Heico takes pride in its decades of experience in manufacturing and supplying its products, as well as its growth strategy based on complementary acquisitions. In fact, its revenues have grown steadily from $26 million in 1990 to $3.8 billion, and its net income has risen from $2 million 25 years ago to $478 million in the past 12 months.
Heico has managed to post quarterly net losses only rarely. In the third quarter, Heico posted its all-time high quarterly net sales and net income figures, amounting to over $992 million and $136 million, respectively. Consequently, this under-the-radar stock has enjoyed a significant boost in value this year as smart investors snatched it up.
While the precise reasons for Buffett and Berkshire's interest in Heico remain unknown, it's likely that the investment giants were drawn to the company's consistent performance.
Buffett and his team are also acutely aware of the current surge in travel demand, which benefits the commercial airline segment. Additionally, conflicts and rising tensions in global hotspots spur growth in the defense sector.
It's worth noting that Heico is a reliable dividend payer, having dispensed semi-annual distributions 92 consecutive times since 1979. However, its dividend yield is relatively low, at less than 0.1%.
Timely opportunity
Berkshire initiated its Heico investment in the second quarter of this year, amassing a 1.04 million share stake valued at over $185 million. It increased its holdings in the third quarter with a purchase of 5,445 shares, boosting its total stake to nearly $214 million.
Interestingly, the third-quarter buy was a small one, as Berkshire made only three equity purchases during the quarter. Buffett and his team were more active in selling shares, offloading "only" $1.5 billion worth of shares compared to $34.6 billion in sales. So the fact that they chose to add to their Heico stake indicates a strong conviction in the company.
In my opinion, this conviction is justified. Heico has consistently demonstrated its competence and ability to meet its client base's needs. Moreover, it operates in a sweet spot with both its client bases (airlines and defense companies) currently experiencing growth. While the dividend yield could certainly be higher, it's not a deal-breaker. Just like Berkshire, I believe Heico's stock is a worthwhile investment.
Following Buffett's lead and Berkshire Hathaway's recent increases in Heico's holdings, many investors might be considering investing their money in the company's shares. Heico's impressive performance, consistent growth, and reliable dividend payouts have attracted the attention of notable investors like Buffett.
Given Heico's strong financial performance and growth opportunities in both the commercial aviation and defense sectors, investing in the company could be a wise financial decision for those seeking long-term gains.
