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Tickers in this Article: HEI, BRK.A, BRK.B, GE, UTX, NOC, LMT
In the past month, aircraft replacement-parts maker Heico (NYSE:HEI) has watched its stock crater, falling by almost 50%. Last week, Warren Buffett offered this piece of wisdom about Berkshire Hathaway (NYSE:BRK-A, BRK-B) in his most recent annual letter: "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." The issue for investors is whether Heico stock qualifies as quality merchandise.

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A History of Steady Growth

In the past four years, HEI has grown sales from $215.7 million in 2004 to $582.3 million in 2008. Even more impressive is the increase in operating income, rising from $32.6 million in 2004 to $105.8 million this past year. On a cumulative basis, that's a 170% increase in sales and a 225% increase in operating income.

But, can Heico sustain this kind of growth? In the short term it's unlikely. However, new management took over the company in 1990 and it's been full throttle ever since, growing revenues over the past 18 years at a compound annual growth rate of 19% ($26.2 million to $582.3 million) and net income ($2.0 million to $48.5 million) by 20%. It certainly explains the long-term appreciation of its stock, which has increased in 13 out of 18 years since 1990. $100 invested back then was worth $2,872 at the end of October 2008. (To learn how to evaluate a company's numbers, see Fundamental Analysis: What Is It?)

Bumps on the Tarmac
Heico has two operating segments: the flight support group (75% of revenue) and the electronic technologies group (25% of revenue). The flight support group makes replacement parts for jet engines and other aircraft components, with Lufthansa Airlines owning 20% of subsidiary Heico Aerospace. Competition in the replacement parts business is intense, and General Electric's (NYSE:GE) aviation division, along with United Technologies' (NYSE:UTX) Pratt & Whitney unit, are Heico's main competition.

Despite 2008 being GE Aviation's best year ever, it will cut 1,000 jobs in 2009. The engine maker is still expecting to be busy building engines through 2012. Nonetheless, GE's management remains cautious in the wake of the unstable economy. United Technologies reiterated its 2009 guidance recently, suggesting business isn't as bad as everyone believes. I guess we'll see, though I'm more inclined to believe Heico's pessimistic view for 2009.

Heico's electronics technologies group makes electronic gadgets used by military agencies and other in-the-field organizations. Northrop Grumman (NYSE:NOC) and Lockheed Martin (NYSE:LMT) are two large military contractors using Heico's laser rangefinder receivers for their targeting weapon systems.

Solid Value
While it currently only holds 2% of the aircraft replacement parts market, Heico believes its superior service will enable it to grow market share. The relationship with Lufthansa certainly helps deliver clients like American Airlines and Delta Airlines. In 2008, HEI improved operating margins 130 basis points, which led to it lowering total debt by one-third to $37.6 million. To be on the safe side, Heico then hiked its credit facility from $130 million to $300 million to ensure adequate financing was in place for 2009.

Heico's debt to equity is at its lowest levels in the past 10 years, and its book value per share has increased in eight of the last nine years, from $7.67 to $15.82. The company's current price-to-earnings and price-to-sales ratios are both much lower than in recent history. Those interested in receiving income should know the company recently paid its 61st consecutive semiannual cash dividend.

Bottom Line
Heico's stock dropped $8.60, or 26%, on February 25, the day after announcing that its first-quarter top- and bottom-line results missed analyst estimates (42 cents per share versus 43 cents per share and $130.7 million versus $142.7 million), and that 2009 would see flat to slightly negative revenues and earnings. I'm not sure the news warranted a 26% drop, but these days any bad news can be a killer. All I know is that Heico has an experienced management team in place that has seen tough times in the past. Only time will tell if Heico will fly again, but I think it's ready to take off.

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