Goldman Sachs recently held an investor meeting with the management of Heico (HEI.US), a leading aerospace and defense supplier. Goldman Sachs highlighted that factors including aerospace aftermarket growth, market share expansion, margin improvements, and acquisitions will drive the company's stock price higher. Goldman Sachs maintains a "Buy" rating on Heico with a 12-month target price of $382. This target represents approximately 19% upside potential from the stock's Thursday closing price of $321.74.

Heico is an aerospace and defense supplier that specializes in manufacturing alternative parts for commercial aircraft and defense products. In the commercial aviation sector, the company is the largest independent producer of aircraft replacement parts. In the defense market, the company produces niche subcomponents for targeting technology and simulation equipment categories. The company operates through two segments: Flight Support Group (FSG) and Electronic Technologies Group (ETG), both serving the aerospace and defense sectors to varying degrees.

Goldman Sachs noted in their research report that the meeting discussions focused on capital deployment, aerospace aftermarket growth, PMA (Parts Manufacturer Approval) components, Wencor integration, and segment margins. The following are key takeaways from the meeting.

**1. Capital Deployment** Heico indicated that the pipeline of acquisition opportunities remains very active. As aerospace and defense industry profitability and valuation multiples normalize post-pandemic, more businesses are coming to market (including founder-led deals, traditional investment banking-led transactions, and divestiture opportunities). Heico is evaluating roughly equal numbers of opportunities across both Flight Support Group (FSG) and Electronic Technologies Group (ETG), with continued focus on core commercial aviation and defense businesses. The company's net debt/EBITDA ratio currently stands at approximately 2.0x, providing ample balance sheet capacity for acquisitions.

**2. Aerospace Aftermarket** Heico has not observed any slowdown in commercial aftermarket activity, driven by fleet aging, limited new aircraft supply, and sustained flight demand. The company also noted that many airlines have made significant retrofit and modernization investments in mid-life aircraft, thereby extending aircraft retirement timelines. That said, aftermarket growth is expected to gradually normalize over the long term to approximately 2x GDP/ASK (Available Seat Kilometers, a capacity metric), rather than the current level of approximately 14-15%. While demand has softened in some parts of the United States, Heico's business activity remains robust, with the company reporting minimal impact year-to-date.

**3. PMA (Parts Manufacturer Approval)** Heico sells PMA parts to both commercial aviation and defense customers, maintaining the same discount to Original Equipment Manufacturer (OEM) parts across both end markets. When the company introduces new PMA parts to the market, it prices these parts at 70% of OEM part prices and maintains this pricing throughout multi-year long-term agreements. As OEMs continuously increase prices on original parts, the company's discount expands, sometimes reaching 50-60% of OEM part prices. This pricing strategy positions Heico favorably to sell more PMA parts to customers, thereby gaining market share, after which the company gradually increases prices. In commercial aviation, Heico's PMA business is relatively mature, while in defense, PMA adoption remains in early stages and is unlikely to materially impact 2025 performance. Company management believes defense PMA opportunities are roughly equivalent to adding 1-2 large airline customers. Defense PMA is typically limited to commercially-derived platforms, such as the Poseidon P8 (737NG derivative), KC-135 (367-80 derivative), or KC-46A (767 derivative).

**4. Wencor Integration** Heico continues to realize synergies from the Wencor acquisition. While the initial plan was to more fully integrate the business into Heico's operations, the company found that significant cross-selling and MRO (Maintenance, Repair & Operations) synergies could be achieved while keeping Wencor relatively independent. Nevertheless, there remain some opportunities to move personnel and product lines between Heico and Wencor, while maintaining Wencor's independent operation has actually expanded the company's future acquisition scope. The Wencor integration is driving FSG margins higher as the company can sell more PMA parts, which carry higher margins due to lower cost intensity.

**5. Segment Margin Performance** Heico reiterated expectations for FSG EBIT margins of approximately 24% in the medium term, with further upside potential over the long term. Recent margin outperformance has been driven by higher defense volumes and PMA-friendly repair operations. Approximately 15-20% of FSG revenue comes from defense, where Heico produces structural components for missile defense (accounting for more than half of this segment's defense revenue) as well as unmanned systems.

For ETG, margins remain below pre-pandemic levels, partly due to the Exxelia acquisition contributing approximately 200 basis points of EBITA margin pressure, as well as business mix changes (defense revenue currently represents approximately 40% of ETG revenue versus approximately 50% pre-pandemic). However, the company believes ETG still has opportunities for margin expansion going forward.