Description

Heico Corp makes highly engineered jet engine parts and ground support
equipment for the airlines. The great attraction of Heico's stock is that
the company should soon resume its strong growth rate of more than 20% per
year -- probably in excess of 25% per year -- and its stock, at 12 9/16, is
selling at an unbelievably low price for this rate of growth: just 12 1/2
times earnings estimates for the fiscal year beginning November 1.

The stock has been weak recently because of soft sales in the older
portion of the company's product line. I love temporary problems such as
this one, because they typically provide the greatest of buying opportunities.
Half-seriously, I think that one of the best investment strategies could
be to seek out great companies and then wish real hard that something bad
happens to them -- something temporarily bad, of course. When problems
raise their head, Wall Street can be depended on to put a company on skewers
and hold it over the fire, regardless of whether the problem is temporary
or permanent.

Heico is in a good business because the company has only one other
competitor for each product it sells, i.e., the engine's original equipment
manufacturer (OEM). The market for new jet engines is controlled by three
companies: Pratt & Whitney, GE, and Rolls-Royce. This is a very high margin
business. Despite selling its parts at more than a 20% discount to the OEM,
Heico obtains a rich, 30%+ operating margin in its jet engine parts division.
Operating profits run in excess of 30% on tangible operating assets.

Heico's parts division has been soft during the current fiscal year,
ending October. Revenue growth excluding the boost from acquisitions has
been positive but less than the customary 20%+. This is primarily because
airlines are deferring maintenance on, or putting out to pasture because of
age, a popular Pratt & Whitney engine, called the JT8D, that is no longer
in production.

It should be expected that old engines would be put out to pasture. As
for maintenance, the airlines can't defer maintenance indefinitely and will
have to resume their former pace of parts purchases purchases soon. In the
meantime, Heico is coming out with a bumper crop of new products, 80% of
which are unrelated to Pratt's JT8D. Also in the meantime, Heico's
Electronics and Ground Support division, now one-third of consolidated
profits (but destined to go back down after the sale of a subsidiary),
is growing at more than 70% internally, more than pulling up the slack from
the jet engine parts business. Heico's EPS, excluding the distortive effects
of acquisition-related charges, were up 21% in the latest quarter.

If one takes a look at all the new jet engine parts that Heico is
coming out with, it's hard to find a reason for Heico not to grow
tremendously over the next few years. In January 1999, they were selling
799 parts. Now, they're selling more than 1,700. Within a few years, the
new parts will represent the vast majority of Heico's revenue, and everybody
will be hard-pressed to remember what the fuss was about with the JT8D.

The management is top-notch. A former executive whom I tracked down
said that Heico's CEO, Larry Mendelson, is one of the smartest guys one is
ever likely to meet. I like how the management is imaginative and ambitious.
They've always strived to find new ways to grow their company.

The company's growth record is specatacular. From 1995 to 1999,
revenue and earnings per share compounded at 53% and 78% per year,
respectively. Without the boost from acquisitions, revenue growth would
have been 26%. Acquisitions have been consistently beneficial to
shareholders. A management that knows how to grow their business like that
inevitably finds a way to get back on track.

Longer term, Heico has a lot of room to grow from its $200 million
sales base. The three engine makers are the sole suppliers on the vast
majority of engine parts. Heico has barely scratched the surface on this
market.

Catalyst

Earnings growth. Growth is the best catalyst. In addition, the recently-
announced sale of a unit may turn out to be a catalyst for a restructuring.