HEICO: Quality, Cash Flow, and Compounding

HEICO is a specialized aerospace and defense company built around supplying mission-critical components and services to some of the most demanding industries in the world. Through its dominant position in aircraft aftermarket parts and its growing presence in defense, space, and advanced electronics, HEICO combines recurring demand, high engineering complexity, and disciplined capital allocation. Supported by a decentralized culture and a long track record of compounding cash flows through organic growth and acquisitions, the company has quietly become one of the most consistent performers in its space. The question remains: Does HEICO deserve a place in a long-term investment portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in HEICO at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of HEICO, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

HEICO is a decentralized aerospace and electronics group built around owning and operating many small, highly specialized businesses that supply products used in “cannot fail” environments. The company is structured so that subsidiaries retain significant autonomy and stay close to customers, while still benefiting from the scale advantages of the wider group, including capital, market access, shared know-how, and the ability to fund R&D and acquisitions. This operating model is designed to harness entrepreneurial decision-making at the business level and combine it with the resources of a larger organization, which management believes supports sustained outperformance versus the broader market. The business is primarily split into two operating segments. The Flight Support Group is the core aerospace platform and is best known for providing FAA-approved replacement parts and repair solutions for commercial and military aviation. A large part of this segment is tied to the Parts Manufacturer Approval framework, where HEICO develops and sells replacement components that are functionally equivalent to original manufacturer parts but typically offered at a lower cost. In addition to replacement parts, the group provides repair, overhaul, and distribution services across a wide range of aircraft components. The key economic feature is that aviation maintenance is recurring by nature, because parts must be inspected, repaired, and replaced throughout the life of an aircraft and its engines. As aircraft platforms mature and move beyond warranty periods, operators tend to become more focused on cost and turnaround time, which increases demand for alternative parts and specialized repair solutions. The Electronic Technologies Group designs and manufactures highly engineered, mission-critical electronic and electro-optical components used in defense, space, aviation, medical, and telecommunications applications. These products typically serve niche requirements but are embedded inside larger systems where performance and reliability are non-negotiable. In practice, this segment benefits from demanding qualification standards, long program lifecycles, and customer preference for suppliers with proven track records in harsh operating conditions. HEICO’s competitive moat is built on regulatory barriers, deep engineering and manufacturing know-how, long-standing trust with safety-critical customers, and a proven ability to scale approvals faster than competitors, reinforced by a decentralized culture that continuously drives cost, quality, and turnaround advantages.  In aerospace replacement parts, regulatory approvals and customer trust form a powerful defense. The PMA process requires deep engineering capability, extensive documentation, testing, and regulatory review, and the pace at which competitors can scale is constrained not only by technical difficulty but also by the regulator’s confidence in the applicant and the capacity of the approval system itself. HEICO’s long history, large catalog of approved parts, and consistent ability to add new approvals at a high rate makes it difficult for smaller entrants to match its breadth and throughput. This is reinforced by the fact that customers operating in safety-critical settings place a high premium on suppliers with established reliability and a proven quality record, which lowers perceived risk when adopting alternative parts and repairs. Another layer of the moat comes from accumulated know-how rather than patents. HEICO emphasizes proprietary techniques, software, and manufacturing expertise that are embedded in processes and engineering judgment. This type of advantage tends to be difficult to replicate quickly because it is built through years of iteration, learning curves, and operational discipline, and it matters even more when products must meet strict regulatory and customer qualification requirements. The decentralized model also acts as a competitive advantage. By giving operating companies wide autonomy, HEICO can remain responsive to customer needs and encourage practical decision-making focused on cost-effective solutions, quality, and turnaround. Management’s willingness to tolerate some product overlap across subsidiaries, and even allow customers to choose between different HEICO businesses, creates internal pressure to keep improving and prevents complacency. At the same time, subsidiaries can cooperate when it benefits the customer, including bundling complementary offerings or coordinating on development projects. This combination of autonomy and optional cooperation helps HEICO act like a collection of focused specialists while still benefiting from group-level scale. Finally, the company’s long-term compounding model strengthens the moat over time. A disciplined acquisition approach expands the portfolio into adjacent niches, broadens customer relationships, and adds new technical capabilities, while the recurring nature of aviation maintenance and long program cycles in defense and space support durable demand. Management’s stated focus on consistently outgrowing the market, supported by decades of strong profit compounding, suggests a system designed to keep widening its capability set and deepening customer trust as it scales.

Management

Eric A. Mendelson and Victor H. Mendelson serve as the co-COEs of HEICO, continuing a family-led leadership model that has defined the company for more than three decades. They assumed the co-CEO roles in May 2025, following the passing of their father, Laurans “Larry” Mendelson, who transformed HEICO into one of the most successful compounders in the aerospace industry. The transition was less a change in direction than a formalization of a leadership approach that has been deeply embedded across the organization for decades. Both Eric A. Mendelson and Victor H. Mendelson joined HEICO in 1990 and grew up alongside the business long before that. Their father involved them early, routinely asking for their views on marketing, sales, and operations, instilling confidence, judgment, and a sense of ownership from a young age. That upbringing shaped not only their management style but also the broader culture of HEICO, which emphasizes fairness, excellence, quality, and, above all, doing the right thing. A defining lesson from their father was an obsession with real earnings and cash flow, not cosmetic metrics. While strict adherence to GAAP discipline was always enforced, the ultimate focus was on sustainable cash generation and long-term value creation. Eric A. Mendelson has spent his career primarily shaping HEICO’s aerospace aftermarket platform. He has been President and CEO of the Flight Support Group since its formation in 1993 and is widely regarded as the principal architect of HEICO’s Parts Manufacturer Approval strategy. Under his leadership, the company pioneered and scaled FAA-approved replacement parts into a global franchise, building deep technical expertise, regulatory credibility, and trusted relationships with airlines and maintenance providers. His long tenure has given him unmatched familiarity with the FAA approval process, customer economics, and the operational details that underpin HEICO’s reputation for quality and cost-effective solutions. Eric’s leadership style reflects the company’s decentralized philosophy, empowering individual businesses while holding them to high standards of execution and returns. Victor H. Mendelson has played a similarly foundational role on the electronics and defense side of the business. As founder and long-time leader of the Electronic Technologies Group, he built a portfolio of niche, mission-critical electronics businesses serving aerospace, defense, space, and medical markets. His background as HEICO’s General Counsel for fifteen years also shaped the company’s disciplined acquisition strategy and governance framework, particularly in structuring deals that preserve entrepreneurial autonomy while aligning incentives for long-term performance. Victor’s experience spans operations, legal oversight, and capital allocation, giving him a holistic view of the company’s risk profile and growth opportunities. The sustained expansion of the Electronic Technologies Group under his stewardship reflects a consistent focus on complex products, harsh environments, and customers for whom reliability is non-negotiable. Together, Eric A. Mendelson and Victor H. Mendelson embody a leadership culture that treats HEICO as a private business despite its public listing. The Mendelson family remains significant shareholders, and the dual-class share structure reinforces long-term control, allowing management to prioritize durable value creation over short-term market pressures. This philosophy extends to employees, referred to as team members rather than staff, and supported through generous retirement plans, open communication, and a strong safety culture. Management has repeatedly demonstrated willingness to reduce their own compensation during downturns while continuing to invest in research and development and fully fund employee benefits, reinforcing trust across the organization. Standing beside their father for more than three decades, Eric A. Mendelson and Victor H. Mendelson absorbed not only the mechanics of building a high-quality industrial business but also the values that sustain it. Their continuation as co-CEOs ensures that HEICO’s distinctive culture of decentralization, frugality, technical excellence, and cash-flow discipline remains intact, providing continuity that is rare among public industrial companies and a leadership foundation designed to endure well into the future.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. HEICO’s ability to consistently generate a return on invested capital above 10% is largely a function of its business mix, operating culture, and disciplined capital allocation. A meaningful share of profits comes from aerospace aftermarket activities such as FAA-approved replacement parts and specialized repairs, which are sold into safety-critical environments with high switching costs and limited price competition. Once approved and adopted, these parts tend to generate recurring cash flows over long periods. This is reinforced by HEICO’s decentralized structure, low bureaucracy, and strong emphasis on cash flow and economic returns. Capital is typically deployed into small, targeted acquisitions and internal development projects with clear return expectations, which helps protect overall returns from dilution. The relative stability of ROIC across the past decade reflects the predictability of HEICO’s end markets and the consistency of its strategy. Aircraft maintenance demand is structurally recurring and less cyclical than new aircraft production, while defense and space electronics programs are long-cycle and contract-driven. Even during periods of stress, such as the COVID downturn, the company avoided aggressive capital spending and large, risky acquisitions that could have permanently impaired returns. Instead, it continued to add PMA parts, expand repair capabilities, and acquire niche businesses at a measured pace. This creates a smoothing effect at the group level, where fluctuations in individual subsidiaries are absorbed without materially altering the overall return profile. ROIC is not materially higher because HEICO operates in industries with real and unavoidable capital requirements. Aerospace and defense demand continuous investment in engineering, regulatory compliance, testing, and manufacturing capabilities. The PMA and DER approval processes are costly and time-intensive, and many electronics programs require upfront development before revenue scales. In addition, management deliberately reinvests heavily in R&D and acquisitions to extend the company’s long-term growth runway. These investments increase the capital base ahead of earnings and naturally cap near-term ROIC, even if they are highly attractive over a multi-year horizon. HEICO also maintains some strategically important but lower-return activities, such as certain defense programs and OEM subcontracting work, which enhance customer relationships and stability rather than maximizing standalone returns. Looking ahead, ROIC is likely to remain in the low-to-mid teens rather than expand significantly. Aging global aircraft fleets, rising utilization, and ongoing supply-chain constraints should support demand and pricing in the aftermarket, helping sustain returns. At the same time, continued investment in new parts, electronics capabilities, R&D, and acquisitions will likely keep ROIC from structurally moving much higher. The key signal is not a rising ROIC, but its durability: maintaining returns comfortably above the cost of capital while compounding earnings at mid-teens rates. That combination has defined HEICO’s performance for decades and remains central to its investment case.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. HEICO’s ability to grow its equity by well over 10% per year for more than a decade mainly comes down to a simple and repeatable pattern: the company earns good money every year and reinvests a large part of it back into the business in sensible ways. HEICO steadily builds value by expanding what it already does well. Profits are used to develop new aircraft parts, improve repair capabilities, and add small, high-quality businesses that fit neatly into the group. A big reason this works is the kind of markets HEICO operates in. Aircraft maintenance and mission-critical electronics are not optional activities. Planes must be kept flying safely, and defense and space systems must work in extreme conditions. This creates a steady flow of business even when the broader economy slows. Because the cash coming in is relatively predictable, management can keep reinvesting year after year without taking big risks or putting the balance sheet under pressure. The way HEICO grows also matters. Instead of doing large, headline-grabbing acquisitions, the company usually buys smaller niche businesses with experienced teams and established customer relationships. These businesses are allowed to keep operating independently, which helps preserve what made them successful in the first place. Over time, many small additions quietly increase the company’s earning power, and that growth shows up directly in rising equity. Culture plays an important role as well. HEICO is run with a strong ownership mindset, shaped by the Mendelson family’s long involvement in the company. Decisions are made with a long time horizon in mind, focusing on durability and steady progress rather than short-term results. Management tends to be cautious with spending, avoids unnecessary complexity, and consistently prioritizes reinvesting in areas that strengthen the business for the future. Looking ahead, equity growth above 10% per year looks achievable, even if the exact pace varies from year to year. As the company becomes larger, growth may naturally slow somewhat, but the underlying drivers are still there: recurring demand from aging aircraft fleets, long-lasting defense and electronics programs, and a proven approach to reinvesting profits wisely. More than anything, HEICO’s track record suggests that its equity growth is not the result of a single favorable period, but of a system designed to steadily build value over long periods of time.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. HEICO’s free cash flow has grown in most years because the company is very good at turning its day-to-day business into real cash. Much of what HEICO sells are replacement aircraft parts, repairs, and specialized electronics that customers need on a regular basis. Airlines have to keep planes flying safely, and defense and space systems have to work reliably, regardless of the economic cycle. This creates steady demand and allows HEICO to collect cash consistently while keeping costs under control. Management often emphasizes that every business inside HEICO is focused on cash generation, not just reported profits, and this mindset shows clearly in the long-term trend. The drop in free cash flow in fiscal year 2023 is largely explained by the acquisition of Wencor. Large acquisitions temporarily use up cash for the purchase itself, integration work, and building up inventory. This does not mean the underlying business became weaker. Instead, cash was deliberately used to expand HEICO’s future earnings power. The recovery in free cash flow in the years that followed shows that the acquisition quickly began contributing to the company rather than draining it. Free cash flow reached a record high in fiscal year 2025 because several positive factors came together at the same time. Demand was strong across both major parts of the business, helped by high aircraft usage and aging fleets that require more maintenance. At the same time, investments made in earlier years started to pay off. Parts developed in the past and businesses acquired earlier were now generating cash without requiring the same level of ongoing spending. Combined with HEICO’s focus on efficiency and fast turnaround times, this pushed cash generation to a new high. It is unlikely that free cash flow will hit a new record every single year, as results can move around depending on the timing of acquisitions and investments. However, the overall direction should remain positive. As long as HEICO continues to expand its range of approved parts, grow its repair and electronics businesses, and integrate acquisitions sensibly, cash generation should continue to increase over time, even if there are occasional pauses or dips. Free cash flow margins have been fairly stable because of how HEICO runs its operations. The company keeps decision-making close to customers, avoids heavy central overhead, and encourages practical, cost-conscious behavior at each subsidiary. This makes it easier to grow the business without costs rising just as fast, which helps preserve cash generation even as the company gets larger. HEICO uses its free cash flow in a straightforward and disciplined way. A small portion is paid out to shareholders through a long-standing, modest dividend, mainly as a signal of confidence rather than a way to maximize payouts. Most of the cash is reinvested back into the business by developing new products, improving existing operations, and buying small, specialized companies that strengthen the group. This reinvestment-first approach is a key reason why HEICO has been able to grow steadily and build value over long periods of time. The free cash flow yield indicates that HEICO typically trades at a premium valuation, which reflects the market’s confidence in the company’s quality and long-term growth prospects. Valuation will be revisited later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to assess whether a business has manageable debt that can realistically be repaid within a three-year period. This is calculated by dividing total long-term debt by earnings. Based on this approach, HEICO currently has 3,15 years of earnings in debt, which is slightly above the three-year threshold. That said, this number needs to be viewed in context. Management has been very clear that HEICO is comfortable using debt when it serves a clear purpose, particularly for acquisitions that strengthen the business long term. Importantly, the company does not aim to carry high debt levels permanently. Management has repeatedly stated that a leverage level around two times EBITDA is considered a comfortable “normal” position for HEICO, reflecting confidence in the company’s stable and recurring cash generation. At the end of fiscal 2025, HEICO’s debt position had already improved meaningfully compared to the prior year, following the integration of recent acquisitions. This shows that while debt may increase temporarily to fund growth, the company has a strong track record of bringing it back down within a relatively short period. Management has even indicated that they would be willing to accept a temporary spike in debt for the right acquisition, as long as it could be reduced again within roughly one to two years. What ultimately supports this approach is HEICO’s ability to generate large amounts of cash year after year. Strong cash inflows give the company significant flexibility to reduce debt, fund acquisitions, and continue investing in the business at the same time. As a result, while the 3,15 years figure is slightly above the preferred threshold, the underlying debt profile appears well controlled and consistent with HEICO’s long-standing, disciplined approach to growth.

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Risks

Competition is a risk for HEICO because it operates in demanding industries where customers have alternatives, competitors are well resourced, and the balance of power can shift over time, even in niche markets with high barriers to entry. In the Flight Support Group, HEICO competes most directly with original equipment manufacturers such as General Electric, Pratt & Whitney, and Rolls-Royce. These OEMs benefit from strong brand recognition, deep customer relationships, broad product portfolios, and significant financial and technical resources. They are often the default choice when aircraft and engines are new, and they can bundle parts, service agreements, and long-term maintenance contracts in ways that make it harder for independent suppliers to compete on anything other than cost and turnaround time. OEMs also operate their own repair and overhaul networks, which puts them in direct competition with HEICO’s repair and distribution businesses. Beyond OEMs, HEICO also faces competition from major commercial airlines that run in-house maintenance and overhaul operations, as well as independent repair organizations around the world. Some of these competitors have lower labor costs or regional advantages that allow them to offer aggressive pricing. A more structural competitive risk in the Flight Support Group comes from the control OEMs exert over technical data and design information. While HEICO has built a strong track record navigating the FAA approval process and developing PMA parts independently, OEMs could choose to compete more aggressively in the aftermarket by lowering prices, tightening access to data, or using their scale to lock customers into long-term agreements. Historically, HEICO has also faced legal challenges from OEMs seeking to protect their aftermarket dominance. For example, United Technologies pursued litigation against HEICO in the past, alleging unfair competition and misuse of trade secrets. Although HEICO ultimately prevailed and emerged stronger, these episodes highlight that competition in the aftermarket is not purely commercial and can involve legal pressure. In the Electronic Technologies Group, competition is different but no less intense. The markets are highly fragmented and populated by both large, well-capitalized defense and electronics companies and smaller, specialized firms. Competition is based on technical performance, reliability, speed of development, customer support, and price. Many competitors have the resources to invest heavily in new technologies, and smaller players can sometimes move faster or accept lower margins to win contracts. Because these products are often designed into larger systems, losing a program can mean losing years of future revenue, making each competitive bid strategically important.

Exposure to air travel cycles and public-sector budgets is a meaningful risk for HEICO because a large part of its business ultimately depends on factors that are outside the company’s control, even if execution at the operating level remains strong. On the commercial aviation side, HEICO’s Flight Support Group is closely tied to the health of the global airline industry. Demand for replacement parts, repairs, and overhaul services is driven by how much aircraft are flown and how long fleets remain in service. When airlines are profitable and aircraft utilization is high, maintenance activity tends to be steady and predictable. However, when air travel slows, airlines often respond by grounding aircraft, reducing flight hours, deferring non-essential maintenance, or retiring older planes earlier than planned. In such periods, demand for HEICO’s parts and services can decline, and inventory tied to specific aircraft or engine platforms may lose value. The aviation industry has historically been cyclical and vulnerable to external shocks. Global recessions, pandemics, geopolitical conflicts, changes in trade policy, terrorism, or environmental and regulatory constraints can all reduce passenger demand and airline profitability. The COVID-19 pandemic illustrated how quickly air travel can collapse and how sharply maintenance activity can fall when aircraft are parked for extended periods. While HEICO’s aftermarket focus provides some resilience compared to aircraft manufacturers, prolonged downturns still translate into lower volumes, pricing pressure, and increased credit risk as customers face financial stress. Another risk within commercial aviation is fleet change. Airlines regularly adjust their fleets by retiring older aircraft, accelerating transitions to newer models, or grounding specific engine platforms due to technical or regulatory issues. If aircraft or engines for which HEICO supplies parts or repair services are retired or grounded for long periods, the addressable market for those products shrinks. This can reduce revenue and leave the company with excess or obsolete inventory linked to those platforms. On the government side, HEICO’s Electronic Technologies Group has significant exposure to defense, space, and homeland security spending. A meaningful share of revenue comes from military agencies, defense contractors, and satellite and spacecraft programs. While these programs are often long-term and less sensitive to short-term economic cycles, they depend heavily on government budgets and political priorities. Changes in defense spending, budget cuts, program delays, or the winding down of major military or space initiatives can lead to lower order volumes or slower project timelines. Taken together, HEICO’s dependence on commercial aviation activity and government budgets creates a layer of macro-level risk that even a well-run company cannot fully eliminate. The business is exposed to cycles in air travel demand and shifts in public-sector spending priorities, both of which can change abruptly.

Regulatory and compliance exposure is a structural risk for HEICO because its entire business model depends on operating within some of the most tightly regulated industrial environments in the world, where the consequences of failure are severe and often immediate. In commercial aviation, HEICO’s Flight Support Group operates under continuous oversight from the Federal Aviation Administration and equivalent authorities in other countries. Every replacement part HEICO manufactures and every repair or overhaul it performs must meet strict airworthiness standards and be supported by detailed documentation. Parts cannot be installed on an aircraft unless they are certified, and repair work can only be performed by approved facilities using certified technicians. If HEICO were to lose, suspend, or even temporarily have restrictions placed on key approvals or certifications, it could be forced to halt sales or services for affected products, directly impacting revenue and customer relationships. This regulatory dependence also creates risk through change, not just failure. The FAA’s PMA framework underpins HEICO’s aftermarket strategy, but it is not static. New rules, tighter interpretation of existing standards, slower approval timelines, or changes in how regulators evaluate alternative parts could raise costs, delay new product launches, or limit the pace at which HEICO can expand its portfolio. Because HEICO adds hundreds of new approved parts each year, even modest slowdowns in the approval process could affect growth and competitiveness. Regulatory risk extends beyond aviation safety into defense, space, and electronics. A significant portion of HEICO’s Electronic Technologies Group operates in markets governed by U.S. and international trade controls, including the International Traffic in Arms Regulations, Export Administration Regulations, and sanctions enforced by the Office of Foreign Assets Control. These rules govern where products can be sold, what technical data can be shared, and which customers are permitted. If export licenses are delayed, restricted, or denied, HEICO could lose access to entire markets or see projects postponed or canceled. Shifts in foreign policy or geopolitical tensions can therefore directly affect sales, even when customer demand remains strong. Government customers add another layer of regulatory exposure. Defense and space programs are subject to detailed pricing rules, procurement regulations, and audit requirements. Changes in government policy, compliance standards, or enforcement priorities can increase administrative burdens or reduce profitability on certain contracts. In extreme cases, violations can lead to fines, penalties, or exclusion from future programs, which would be particularly damaging given the long-term nature of defense relationships.

Reasons to invest

Acquisitions is a reason to invest in HEICO because they are not an opportunistic add-on to the strategy, but a deeply embedded, repeatable system that has compounded value for decades. The company has been acquiring businesses for more than 25 years, completing well over 100 transactions, and this long history has shaped both its culture and its reputation in the market. Acquisitions are not treated as one-off events, but as a continuous process that steadily expands HEICO’s capabilities, earnings power, and long-term growth runway. What makes HEICO’s acquisition strategy particularly attractive is the combination of discipline and scale. The company is not capital constrained and generates substantial cash internally, which allows it to be patient and selective. Management has been very clear that they will only pursue acquisitions that meet strict financial and strategic criteria, are earnings-accretive, and strengthen HEICO’s positioning in niches it already understands well or in closely related adjacent areas. This discipline helps avoid the common pitfall of acquisitions destroying value through overpaying or overexpansion. Another key strength is the quality and depth of HEICO’s acquisition pipeline. Management repeatedly emphasizes that the pipeline is as strong as it has ever been, supported by years of relationship-building with potential sellers. HEICO often engages with entrepreneurs long before they are ready to sell, sometimes a decade in advance. This creates trust and familiarity, and when the time comes, HEICO is frequently the buyer of choice rather than just one bidder among many. In several cases, sellers have chosen HEICO exclusively, even when other buyers were willing to pay similar or higher prices, because they trusted HEICO to preserve their business, culture, and people. HEICO’s reputation as a preferred home for founder-led, entrepreneurial businesses is a major competitive advantage. Many of the companies it acquires are niche leaders with high margins, strong cash generation, and long customer relationships. Founders often care deeply about what happens to their employees and their legacy, not just the sale price. HEICO’s decentralized model, minimal interference, and long-term mindset resonate strongly with these sellers. Rather than integrating acquisitions into a rigid corporate structure, HEICO allows them to continue operating independently, keeping management teams in place and incentivized. Structurally, HEICO often acquires a majority stake rather than 100% ownership, typically at least 80%. This approach keeps founders and key managers invested in the future success of the business, aligning incentives and maintaining an entrepreneurial spirit. Over time, HEICO usually secures the right to buy the remaining shares, while sellers retain the option to sell their stake back at agreed-upon terms. The financial logic behind HEICO’s acquisitions is also compelling. The company strongly prefers businesses with high margins and strong cash flow, often targeting operating margins well above those of typical industrial companies. Management has repeatedly explained that high margins allow capital to be redeployed far more efficiently, enabling faster compounding over time. By focusing on many small, low-risk acquisitions rather than large, company-transforming deals, HEICO steadily reinvests cash into opportunities that can be absorbed without disrupting the broader organization. Recent acquisitions, such as those completed in fiscal 2024 and 2025 and the announced Ethos transaction, illustrate how this strategy continues to evolve. These deals expand HEICO into adjacent areas like industrial gas turbines, where management sees long-term tailwinds from rising power demand, including AI-related infrastructure. Importantly, these expansions are not leaps into unfamiliar territory, but extensions of existing engineering, manufacturing, and repair capabilities that HEICO already understands well.

Trends in the aerospace sector are a reason to invest in HEICO because several long-term industry dynamics are aligning almost perfectly with how the company makes money. These trends strengthen demand for HEICO’s products, support pricing, and extend the duration of its growth runway rather than creating short-lived boosts. The most important tailwind is the sustained growth in global air travel. Passenger volumes have not only recovered from the pandemic but have moved beyond pre-2020 levels, with flight activity growing at a healthy pace year over year. More flights mean more takeoffs and landings, and each additional cycle increases wear on aircraft components. Because HEICO earns most of its profits from replacement parts, repairs, and overhauls on aircraft already in service, rising flight activity directly translates into higher demand for its aftermarket offerings. A second powerful trend is the aging global aircraft fleet. Many widely used aircraft types, such as the 737NG, 757, and 767, are now twenty years old or more and remain critical to airline operations. Normally, airlines would gradually retire these aircraft, but ongoing production delays at major manufacturers have forced operators to keep older planes flying longer than expected. Older aircraft require more frequent maintenance and more component replacements, which plays directly into HEICO’s strengths. At the same time, the industry faces a record backlog of new aircraft orders. Airlines around the world want to expand capacity and modernize fleets, but manufacturing constraints mean deliveries are taking much longer than planned. This situation benefits HEICO in two ways. In the short to medium term, delayed deliveries force airlines to rely more heavily on their existing fleets, increasing aftermarket consumption. Over the longer term, when new aircraft are eventually delivered, they expand the global installed base of planes that will generate maintenance demand for decades. Another supportive trend is the growing acceptance of alternative parts and repairs. Airlines continue to face pressure to reduce operating costs, and HEICO’s value proposition has become increasingly attractive as OEM prices have risen. HEICO’s parts often deliver savings of 30% to 50% compared with OEM alternatives, without compromising safety or reliability. Over time, airlines that start using HEICO for a limited set of parts tend to expand that relationship as internal approvals are completed and confidence grows. Management continues to highlight that even its largest airline customers still represent meaningful untapped potential, suggesting that growth is coming not just from new customers, but from deeper penetration of existing ones. Finally, HEICO benefits from its long-standing credibility with the world’s largest airlines. Over decades, it has embedded itself deeply into customer operations through joint development programs, long-term supply agreements, and collaborative relationships. Once airlines rely on HEICO parts across multiple platforms, switching becomes harder and adoption tends to expand gradually rather than reverse.

Defense is a reason to invest in HEICO because it combines long-term demand visibility with a growing need for cost efficiency, speed, and technical problem-solving, areas where HEICO is particularly well positioned. A central driver is the renewed emphasis on defense readiness by the United States and its allies. Governments are under pressure to modernize and maintain large fleets of military aircraft, missile systems, and surveillance platforms while also controlling costs. HEICO fits naturally into this environment because it offers high-quality, reliable components and repairs at meaningfully lower cost than traditional OEM solutions. Many military aircraft are based on commercial designs or use commercial-derived components, and HEICO’s long experience with FAA-approved parts and repairs makes it a logical supplier for these platforms. From the government’s perspective, this helps stretch defense budgets further without compromising safety or performance. HEICO’s missile defense and specialty defense manufacturing businesses are also experiencing strong momentum. Demand from the U.S. and allied nations has increased materially, leading to a growing order book and backlog that supports continued expansion. These activities span missile hardware, drone-related components, structural parts, and other critical systems. Importantly, HEICO focuses on areas where it can add real value and earn attractive returns, rather than chasing every available defense contract. Management has been explicit that it avoids “profitless opportunity,” particularly in space and defense programs that may be strategically interesting but economically unattractive. Another important factor is HEICO’s relevance to both established defense primes and newer defense technology companies. Traditional defense contractors value HEICO for its reliability, manufacturing quality, and ability to meet demanding specifications. At the same time, newer defense tech firms increasingly turn to HEICO for design, engineering, and manufacturing support, especially when speed and execution matter. This dual exposure allows HEICO to participate in both the legacy defense ecosystem and the evolving defense tech landscape, reducing reliance on any single type of customer or program. Programs related to missile defense, surveillance, tracking, and integrated defense systems also represent a meaningful opportunity. While details around initiatives like Golden Dome are intentionally limited, management has indicated that several HEICO subsidiaries are already involved in development work tied to existing and evolving defense programs. The company has had components in systems such as Iron Dome for years, demonstrating both credibility and staying power in this area. Even if individual programs ramp gradually, they tend to be long-lived, creating durable revenue streams once established. There is also a medium-term opportunity in expanding the use of alternative and PMA-style parts within defense. Progress has been slower than in commercial aviation due to government processes, but momentum is building. As defense customers become more comfortable with these solutions and as policy focus shifts toward cost efficiency, HEICO stands to benefit disproportionately given its experience, approvals, and track record.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 4,90, which is from the fiscal year 2025. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 22,5%, but 15% is the highest number I use. Additionally, I have selected a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on HEICO's historically higher price-to-earnings (P/E) ratio. Our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $147,00. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy HEICO at a price of $73,50 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 934, and capital expenditures were 73. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a general guideline, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 51 in our calculations. The tax provision was 148. We have 139,2 outstanding shares. Hence, the calculation will be as follows: (934 – 51 + 148) / 139,2 x 10 = $74,06 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With HEICO's free cash flow per share at $6,19 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $97,71.

Conclusion

I believe that HEICO is an intriguing company with exceptionally strong management and a business model built for long-term compounding. The company has developed a durable moat through regulatory barriers, deep engineering and manufacturing expertise, long-standing trust with safety-critical customers, and a decentralized culture that consistently drives cost efficiency, quality, and fast turnaround times. This model has allowed HEICO to generate a consistently high ROIC, a characteristic that should persist given the nature of its markets and disciplined capital allocation. Free cash flow has grown in most years over the past decade and reached a record level in fiscal year 2025, reflecting both strong operating performance and maturing past investments. At the same time, there are real risks to consider. Competition remains a risk because HEICO faces powerful OEMs with entrenched customer relationships, pricing leverage, and control over technical data in aerospace, as well as intense, technology-driven competition in defense and electronics from both large incumbents and agile specialists. Exposure to air travel cycles and public-sector budgets is another risk, as demand ultimately depends on airline activity and government spending, both of which can change quickly due to economic slowdowns, geopolitical events, or shifting policy priorities, potentially leading to lower volumes, pricing pressure, or underutilized inventory. Regulatory and compliance exposure also matters, as HEICO’s ability to operate and grow depends on maintaining critical approvals and licenses across highly regulated aviation, defense, and electronics markets, where delays or tighter rules could raise costs or restrict access to customers. Against these risks stand several powerful growth drivers. Acquisitions are a key reason to invest in HEICO, as they represent a disciplined and repeatable growth engine that has compounded value for decades by reinvesting internally generated cash into high-quality, niche businesses while preserving their entrepreneurial culture. Trends in the aerospace sector further support the investment case, as rising global flight activity, aging aircraft fleets, and delayed new aircraft deliveries are increasing demand for maintenance, repairs, and replacement parts, which sit at the core of HEICO’s high-margin aftermarket business, while airline cost pressure continues to favor lower-cost alternatives. Defense is another important pillar, with rising spending and a growing focus on cost efficiency, speed, and readiness aligning well with HEICO’s strengths and supporting long-lived demand through missile defense, surveillance, and both established and emerging defense programs. Overall, I view HEICO as an exceptional company, and I would not hesitate to buy shares at the intrinsic value implied by the Payback Time price of $195. I may even consider a higher entry price, as my assumptions could be conservative given that HEICO has compounded its bottom line at roughly 18% annually over the past 35 years.

My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.

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