July 16, 2020 - 9:48pm EST by
2020 2021
Price: 78.79 EPS 2.11 2.11
Shares Out. (in M): 137 P/E 0 0
Market Cap (in $M): 11,830 P/FCF 0 0
Net Debt (in $M): 392 EBIT 0 0
TEV (in $M): 12,222 TEV/EBIT 0 0

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This is a simple idea, a pair trade of long 1 share of HEI.A at $78.79 and short 1 share of HEI at $96.69.  HEI.A shares are economically identical to HEI shares but have 1/10th the vote.  I don't think the vote is worth much here as the company has been extraordinarily well run by the Mendelson family for 30 years.  There are 54 million HEI shares and 81 million HEI.A shares, total 137 million FDS.  Insiders own 9 million HEI shares and 2 million HEI.A shares.  HEI shares trade about $64 million per day and HEI.A shares trade about $31 million per day, so both are reasonably liquid, though historically HEI.A has been less so.

HEI.A shares currently trade at 81.5% of the value of HEI shares, a discount wider than has existed historically.  The bet is that the discount will narrow.  The discount has averaged 84% over the past 5 years and has narrowed to 88% in every single year except 2018, when it got to 86%.  The narrowest the gap has been was in the market selloff in March 2020, when it closed to 94%.  The widest the discount has gotten to in the last 5 years is 75% in 2016, and it got to 76% in late 2019.  There is no solid reason for the existence of the discount, and I'm not sure why it has historically been wider at Heico than other similar companies.  If the company was ever sold (unlikely), then both would receive the same value.

I think an attractive feature of this idea is that it is likely to be countercyclical and perform well in another sharp market selloff, as evidenced by the collapse of the discount a few months ago  There were similar narrowings in the sharp drawdowns in late 2000 and early 2009.  Heico is a terrific company but is trading at historically high valuations, about 32x PE on 2022 estimates (much higher on 2020/2021), so a big downturn at some point is not inconceivable if the winds shift.  I would cover if the discount got close to 90% and then rinse and repeat.

For background, Heico is a manufacturer of niche parts for the aerospace and defense industries.  The company was written up as a long by jumbos02 on 2/2/18 and that writeup provides a thorough overview of the business.

Forbes published a good article on the company and family in January 2020.



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


Sharp market downturn

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