Warren Buffett just added this stock to his portfolio, but investors were dumping it after earnings.
Warren Buffett added two new stocks to Berkshire Hathaway’s portfolio last quarter, including Heico (NYSE:HEI), a Florida-based aerospace, industrial, and defense contractor.
An investment by one of the world’s greatest investors certainly gets a lot of attention and often puts a stock in the spotlight, as has been the case with Heico.
On Monday after the closing bell, Heico released its fiscal third quarter earnings and investors were not all that impressed with the results, as Heico stock dropped about 4% shortly after the market opened on Tuesday.
Let’s examine the results and what may have concerned investors.
Record revenue and earnings
Heico makes the electronics and technology components that go into aircraft, industrial equipment, as well as defense systems. Buffett just added Heico stock to the Berkshire Hathaway portfolio in the second quarter, buying roughly one million shares for a $185 million stake.
While Buffett and his team typically do not comment on why they invested in a stock, at least initially, he was probably at least somewhat pleased with the fiscal third quarter results.
Heico generated record net sales of $992 million, up 37% year over year. This beat most estimates of $986 million, although some analysts had targeted $996 million in net sales.
It also generated record net income of $137 million, or 97 cents per share, which represents a year over year increase of 34%. This easily topped consensus estimates of 91 cents per share.
Obviously, it was a strong quarter for the company, but investors may have been reacting to revenue falling below some estimates, even though it was record revenue.
The selloff could also be in response to net sales coming in below estimates for its Electronic Technologies Group. Net sales in this group were down 1.2% year-over-year to $322 million, which was way below estimates of $364 million.
Heico’s larger Flight Support Group more than made up for it, with a 68% increase in net sales to $687 million and a 72% jump in operating income to $154 million. The year-over-year outperformance of the Flight Support Group came from earnings generated by recent acquisitions, as well as 15% organic growth.
Heico stock is overvalued
While there were no specifics on guidance, at least in the fiscal Q3 earnings report, Heico Chairman and CEO Laurans Mendelson, said the company is optimistic about achieving net sales growth in both of its units in fiscal 2024.
“This growth is expected to be largely fueled by the contributions from our fiscal 2023 and 2024 acquisitions, along with sustained demand for the majority of our products,” Mendelson said. “Additionally, we are committed to ongoing product and service innovation, further market penetration, and maintaining our financial strength and flexibility.”
Based on the numbers and the outlook, it is hard to see why investors reacted negatively to earnings. But when you look at the stock’s valuation, you can see why.
Heico stock has a P/E ratio of 77, up from 67 in January. The stock price is up some 35% year-to-date, and since the Buffett news came out in early August, it has gained 10%.
It is indeed an impressive company, but the valuation is way too high right now to warrant a buy — and with few details on the earnings outlook, some investors saw fit to dump it after earnings.
