We Study Billionaires - The Investor’s Podcast Network

Episode Summary: TIP738: Heico: The Quiet Aerospace Compounder

Release Date: July 18, 2025
Host: Clay Fink

Introduction

In Episode TIP738 of We Study Billionaires, host Clay Fink delves into the remarkable journey of Heico Corporation—a steadfast player in the aerospace industry that has quietly become one of the most impressive compounders in the market. Despite operating under the radar, Heico has delivered extraordinary returns, growing from a $25 million market cap in 1990 to a formidable $38 billion today. This episode unpacks how the Mendelsohn family transformed Heico into an aerospace giant through strategic acquisitions, robust competitive moats, and a long-term investment philosophy that has garnered attention from legendary investors like Warren Buffett and Francois Rochand.

Heico’s Emergence as an Aerospace Leader

Clay Fink begins by highlighting Heico’s exceptional performance since the Mendelsohn family took control in 1990. Under the stewardship of Larry, Victor, and Eric Mendelsohn, Heico has compounded shares at an astounding 22% per annum. A $10,000 investment in 1990 would be worth over $9 million today. The Mendelsohns, leveraging their finance and accounting expertise from Columbia University, orchestrated a significant turnaround by acquiring a 15% stake in the struggling company and launching a successful proxy fight to gain full control.

Notable Quote:
"Heico is one of those companies that does not make the headlines often, but when you look under the surface, you realize it's one of the greatest compounders."
— Clay Fink [00:02]

Business Model and Competitive Advantage

Heico operates primarily in the Parts Manufacturer Approval (PMA) sector of the aerospace industry, supplying FAA-approved replacement parts to airlines. With a staggering 75% market share, Heico dominates this niche by offering high-quality parts at 30-50% discounts compared to OEMs. This significant cost advantage is underpinned by Heico’s ability to reverse-engineer OEM parts, navigate the stringent FAA approval process efficiently, and maintain long-term relationships with major airlines.

Key Points:

• Market Share: Heico holds approximately 75% of the aerospace aftermarket for replacement parts.
• Revenue Growth: Over the past decade, revenues have compounded at nearly 14%, with EPS growing at 16%.
• Product Reliability: Heico boasts a 30+ year track record with zero in-flight part failures, reinforcing their reputation for quality.

Notable Quote:
"The Mendelssohn's take control was probably the greatest thing that ever happened to this business."
— Clay Fink [02:30]

Leadership and Strategic Vision

The Mendelsohn family plays a pivotal role in Heico’s success. Larry Mendelsohn serves as Executive Chairman, while his sons Victor and Eric hold co-CEO positions. Their unanimous decision-making process ensures strategic alignment and minimizes the risk of major errors. This family-led approach fosters a culture of humility, trust, and long-term thinking, distinguishing Heico from typical corporate structures.

Key Points:

• Acquisition Strategy: Heico has completed around 100 acquisitions, with a 98% success rate. They prefer acquiring businesses with strong cash flow, entrepreneurial leadership, and potential for growth.
• Decentralized Operations: Subsidiaries operate autonomously, allowing leaders to focus on their specialized areas without excessive oversight.

Notable Quote:
"There’s no such thing as good business with bad people."
— Eric Mendelsohn [07:45]

Acquisition Success and Financial Discipline

Heico’s aggressive yet disciplined acquisition strategy has been a cornerstone of its growth. The company targets businesses that add to their cash flow without diluting existing value. Their largest acquisition to date, Wincore Group, was valued at $1.9 billion in cash and $150 million in stock, significantly outperforming initial expectations.

Key Points:

• Minimal Share Dilution: Heico meticulously manages share issuance, keeping dilution below 1% per year.
• Conservative Debt Levels: Maintains a debt-to-EBITDA ratio of around 1, even after significant acquisitions.
• Integration Success: High cultural fit and operational synergies ensure seamless integration of acquired companies.

Notable Quote:
"We could charge more, but we don't. We leave money on the table in the short term to build something permanent."
— Larry Mendelsohn [35:20]

Heico’s Culture and Employee Ownership

Heico fosters an ownership-minded culture, encouraging employees to think and act like shareholders. Through their employee stock ownership plan, team members collectively hold around 2% of the company, aligning their interests with those of other shareholders. This culture of mutual respect and shared mission has cultivated a highly motivated and loyal workforce.

Key Points:

• Ownership Incentives: Over 400 team members have more than $1 million in their 401(k)s due to stock incentives.
• Decentralized Leadership: Approximately 80% of acquired subsidiaries remain led by their original founders, ensuring continuity and entrepreneurial spirit.

Notable Quote:
"We treat Heico like our own family business and treat shareholders' capital like we would our own capital."
— Clay Fink [30:10]

Competitive Position and Industry Dynamics

Heico’s formidable position in the aerospace aftermarket is fortified by several key factors:

• FAA Organizational Design Authorization (ODA): Allows internal part certification, reducing regulatory costs and accelerating time-to-market.
• First-Mover Advantage: Early partnerships, notably with Lufthansa Airlines, provided critical market insights and credibility.
• Scale Economies: Their vast scale enables competitive pricing and reinforces customer loyalty, creating a sticky revenue stream.

Key Points:

• Barriers to Entry: High FAA approval standards and established relationships with airlines make it difficult for new entrants to compete.
• Moats: Combination of technical expertise, regulatory know-how, and extensive airline partnerships.

Notable Quote:
"Heico’s acquired subsidiaries are run by entrepreneurial leaders who build from the ground up."
— Clay Fink [20:50]

Financial Performance and Valuation

Heico trades at elevated multiples, with a Price-to-Earnings (P/E) ratio of 76 and an EV-to-EBITDA of 38, reflecting high market expectations for future growth. Despite the premium valuation, Heico’s consistent revenue growth—driven both organically and through acquisitions—supports the optimistic outlook.

Key Points:

• Revenue Growth: Projected organic growth of 7-10% from 2025 to 2027, fueled by global air travel expansion and aging aircraft fleets requiring more maintenance.
• Return on Capital: Historically strong, with returns excluding goodwill in the 25-30% range and a disciplined approach to meeting hurdle rates for acquisitions.

Notable Quote:
"Our culture has been designed for the long term, very different than typical corporate culture or private equity."
— Eric Mendelsohn [45:15]

Risks and Considerations

While Heico presents a compelling investment thesis, there are inherent risks to consider:

• Premium Valuation: High multiples imply that any slowdown in growth or failure to meet market expectations could lead to significant share price declines.
• Market Penetration: PMA parts still represent a small fraction (2-4%) of the total aerospace aftermarket, indicating substantial growth potential but also the need for sustained penetration.
• Regulatory Changes: Increased FAA scrutiny or slower approval processes could hamper Heico’s operational efficiency.

Key Points:

• Economic Cyclicality: Heico benefits in downturns as airlines seek cost savings, but prolonged economic stress could impact overall aerospace demand.
• OEM Competition: Balancing market share capture without provoking aggressive price competition from OEMs.

Notable Quote:
"If Heico's growth slows, or if the broader market rerates high multiple stocks downward, the share price could face meaningful pressure."
— Clay Fink [60:30]

Comparison with Peers: TransDigm

Fink draws a comparison between Heico and TransDigm, another major player in the aerospace aftermarket. While both companies thrive on protective moats and disciplined acquisitions, TransDigm is characterized by a more aggressive, private equity-like approach with higher leverage and significant price hikes. In contrast, Heico maintains conservative debt levels, minimal share dilution, and a long-term growth mindset without aggressively hiking prices.

Key Points:

• Operational Differences: TransDigm employs higher leverage and aggressive pricing, whereas Heico focuses on sustainable growth and maintaining customer trust.
• Cultural Contrast: Heico’s family-led, decentralized culture stands in stark contrast to TransDigm’s performance-driven, profit-centric environment.

Notable Quote:
"Heico is like a miniature Berkshire because they're doing a lot of acquisitions and focusing on creating value for shareholders."
— Clay Fink [55:00]

Conclusion

Heico Corporation exemplifies a robust, family-led business that has successfully navigated the complexities of the aerospace industry through strategic acquisitions, strong competitive moats, and a culture of ownership and long-term thinking. While trading at a premium, Heico's consistent growth, disciplined capital allocation, and unwavering commitment to quality position it as a standout compounder with significant upside potential. Investors looking for a high-quality, stable investment in the aerospace sector would find Heico a compelling addition to their portfolios.

Final Notable Quote:
"Our people have worked hard year in, year out, the most over decades. So I think that's really what makes us unique."
— Eric Mendelsohn [68:45]

For More Information:
To delve deeper into Heico’s investment potential or explore other billionaire strategies, visit theinvestorspodcast.com or subscribe to the free daily newsletter.

This summary is intended for informational purposes and should not be considered investment advice. Always consult with a financial professional before making investment decisions.