HEICO Corporation upgraded to BBB+ by Fitch on strong performance

Investing.com -- Fitch Ratings has upgraded HEICO (NYSE:HEI) Corporation’s Long-Term Issuer Default Rating to ’BBB+’ from ’BBB’ on Wednesday. The rating agency also upgraded the company’s long-term senior unsecured notes and revolver to the same rating, with a Stable outlook.

The upgrade reflects HEICO’s expanding cost-competitive product portfolio, including the integration of Wencor’s non-engine exposure. Fitch cited predictable replacement cycles and high-return growth opportunities that enhance the business and cash flow risk profiles as key factors in the decision.

HEICO has demonstrated a commitment to maintaining a conservative financial profile, as shown by its through-the-cycle free cash flow and faster than expected deleveraging following the Wencor acquisition.

Fitch expects the company to continue pursuing periodic bolt-on acquisitions, with EBITDA leverage fluctuating between 1.5x and 2.5x. The leverage could potentially exceed 3.0x following transformational acquisitions, but management’s track record supports meeting its 2.0x target within 24 months post-acquisition.

The regulatory and utilization-linked nature of HEICO’s offerings and resource requirement contracts provide revenue visibility, offsetting the company’s relatively lower firm backlog compared to similarly rated aerospace and defense peers. The long-term, repetitive nature of Parts Manufacturing Approval products creates predictable revenue streams, as these parts require replacements multiple times over the 20-to-30-year lifecycle of customers’ capital-intensive assets.

Federal Aviation Administration regulation of aircraft parts provides a competitive advantage for HEICO, which has numerous approvals across multiple aircraft platforms. The company’s market position is strengthened by strong customer relationships and strategic partnerships with airlines.

HEICO generates EBITDA margins in the mid-20% range and free cash flow margins in the mid-teens, which Fitch considers strong for both the industry and rating category. These margins are largely driven by aerospace aftermarket exposure, correlated to air travel and aircraft maintenance needs.

Fitch expects air travel and in-service aircraft to grow significantly over the next decade, supporting demand for HEICO and other aftermarket suppliers.

The company’s highly diversified portfolio of niche product offerings provides insulation to its credit profile, ensuring it would not be materially impacted by lower demand for any single product, customer, or program.

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