Latest / The Dutch Investors / #28 | Why Heico will become a 1000-bagger stock

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#28 | Why Heico will become a 1000-bagger stock · The Dutch Investors

0:00
SPEAKER_00: Welcome back to another episode by the Dutch Investors.
0:04
SPEAKER_00: In today's episode, I want to talk about Heiko.
0:07
SPEAKER_00: A few weeks back, our analyst and co-founder Matthijs analyzed Heiko, and it's been quite the compounder, to say the least.
0:16
SPEAKER_00: The company has rewarded its investors with an almost unbelievable 86,000% return since 1990.
0:26
SPEAKER_00: If you're looking for a playbook on how to build a business that creates exponential wealth, Heiko is a story you can't ignore.
0:34
SPEAKER_00: So what exactly enabled Heiko to become a thousand beggar in the making?
0:40
SPEAKER_00: Buckle up, we're about to break it all down.
0:55
SPEAKER_00: On the surface, it may not seem like the most exciting business.
1:00
SPEAKER_00: Airplane parts and electronic components don't exactly scream high growth, right?
1:06
SPEAKER_00: But that's where the magic formula is.
1:09
SPEAKER_00: Heiko was founded in 1957, but its transformation into a serial acquire started in the 1990s, when the Mendelssohn family took over.
1:21
SPEAKER_00: They restructured the company into two key segments.
1:25
SPEAKER_00: The first segment is the Flight Support Group, or FSG for short, and this division produces FAA approved replacement parts for aircraft, competing with major OEMs like Boeing and General Electric.
1:41
SPEAKER_00: It also offers maintenance, repair, and overhaul, or MRO services in short.
1:49
SPEAKER_00: The second division is the Electronic Technologies Group.
1:54
SPEAKER_00: This division operates a collection of niche tech companies that manufacture high-performance electronic components used in aerospace, defense, healthcare, and energy.
2:07
SPEAKER_00: That's a lot of fancy jargon for they make and fix airplane parts, and they build high-tech gadgets for specialized industries.
2:17
SPEAKER_00: The flight support division is all about keeping planes in the air without relying on the big name manufacturers, while the ETG, the Electronic Technologies Group, focuses on creating the latest cutting-edge electronics that power everything from fighter jets to medical devices.
2:38
SPEAKER_00: Now let's get into why Heiko has been so successful.
2:42
SPEAKER_00: And I like to call this the four pillars of Heiko's success.
2:47
SPEAKER_00: One of Heiko's biggest advantages is that they sell aircraft replacement parts for 30-40% less than the original equipment manufacturers, short OEMs, so the Boeings and Airbuses of this world.
3:04
SPEAKER_00: For airlines where every single cent saved per flight translates into millions annually, this is an easy decision.
3:13
SPEAKER_00: Once Haiko recoupes the development cost of a specific part, it further lowers prices, sometimes undercutting OEMs by up to 50%, and this creates a compounding effect.
3:26
SPEAKER_00: The more they sell, the more cost efficient they become.
3:31
SPEAKER_00: Think of Costco or AGEN or even WICE as a great example.
3:37
SPEAKER_00: They all operate on the lowest cost provider mode.
3:41
SPEAKER_00: And here's the best part.
3:43
SPEAKER_00: Airlines need this part.
3:46
SPEAKER_00: It's not a nice to have industry, it's a must-have.
3:50
SPEAKER_00: Planes require constant maintenance, creating an ongoing recurring revenue stream for Heiko.
3:58
SPEAKER_00: The second pillar is about Heiko's business model.
4:01
SPEAKER_00: And it wouldn't be possible without a little-known but crucial certification.
4:06
SPEAKER_00: It's called a PMA, Parts Manufacture Approval.
4:11
SPEAKER_00: This is the FAA certification that allows companies to legally manufacture and sell replacement parts for aircraft.
4:19
SPEAKER_00: But there is a catch.
4:21
SPEAKER_00: Getting a PMA is extremely difficult.
4:25
SPEAKER_00: It requires extensive testing, rigorous quality controls, and very long approval processes.
4:32
SPEAKER_00: And it makes sense, right?
4:34
SPEAKER_00: It has to be the best possible quality, nothing can go wrong.
4:38
SPEAKER_00: Or a plane might fall out of the sky, something nobody wants.
4:43
SPEAKER_00: Heiko has mastered this process like no other.
4:46
SPEAKER_00: Today they hold over 20,000 PMAs, while their closest competitor in the US has just 2,000.
4:56
SPEAKER_00: Think about that for a second.
4:58
SPEAKER_00: They have a 10x lead on their next biggest rival.
5:03
SPEAKER_00: That kind of dominance doesn't happen by accident.
5:07
SPEAKER_00: And what's even more impressive, they have zero safety incidents.
5:12
SPEAKER_00: An industry where trust and reliability are everything?
5:16
SPEAKER_00: That's an extraordinary track record.
5:19
SPEAKER_00: Let's go to the third pillar, the incentive alignment.
5:23
SPEAKER_00: The Mendelssohn's family has built Heiko on the principle of ownership, meaning everyone in the company has to think like an owner.
5:33
SPEAKER_00: Over 400 Heiko employees own over 8 million of Heiko stock in their 401ks.
5:40
SPEAKER_00: When Heiko acquires a company, the management keeps 10 to 20% ownership.
5:47
SPEAKER_00: And this ensures that they stay motivated and committed to the business.
5:50
SPEAKER_00: Even employees collectively own over 2% of the total Heiko shares.
5:56
SPEAKER_00: This excludes the Mendelssohn family, who are heavily invested themselves.
6:02
SPEAKER_00: So it's no surprise that Heiko consistently outperforms given that everyone from top to bottom has a financial stake in the company's success.
6:12
SPEAKER_00: Then the final pillar about disciplined and strategic acquisitions, because Heiko is a serial acquirer.
6:21
SPEAKER_00: But unlike reckless companies that chase flashy deals, Heiko only buys businesses that fit within their ecosystem.
6:29
SPEAKER_00: And the ecosystem mode is one of the least talked about but strongest modes out there.
6:35
SPEAKER_00: Heiko focuses on cash flow-positive businesses that already dominate in a niche.
6:41
SPEAKER_00: They only buy during downturns, when valuations are a lot more attractive, and they avoid risky, high-burn startups or unproven moonshot ideas.
6:52
SPEAKER_00: This is why Heiko's acquisitions are almost always immediately profitable.
6:57
SPEAKER_00: They aren't trying to fix companies, they're trying to buy high-quality assets that fit within their ecosystem.
7:05
SPEAKER_00: So how has all of this translated into the financial performance?
7:10
SPEAKER_00: 75% market share in the PMA business.
7:14
SPEAKER_00: That's basically a monopoly.
7:16
SPEAKER_00: They operate on 16% free cash flow margins, one of the highest in the industry.
7:22
SPEAKER_00: They have consistent revenue and earnings growth over the past 30 plus years.
7:29
SPEAKER_00: But there is a real downside.
7:32
SPEAKER_00: Heiko stock has become very expensive.
7:35
SPEAKER_00: People have come to realize its quality, and with this meteoric rise, the valuation is steep, and that makes it very difficult for new investors to achieve the same returns as before.
7:50
SPEAKER_00: So here are our final thoughts on Heiko.
7:53
SPEAKER_00: Heiko's fundamentals are rock solid, a near monopoly in PMA, a proven acquisition strategy, and an ownership culture that fuels long-term growth.
8:04
SPEAKER_00: However, at the current price the upside seems limited.
8:08
SPEAKER_00: And if the stock price drops back to, say,$150 to$170 per share, that could be a golden opportunity to take a closer look at this compounder.
8:20
SPEAKER_00: Regardless, Heiko's playbook for building a thousand bagger is one investors should study.
8:26
SPEAKER_00: And that wraps up today's episode already.
8:29
SPEAKER_00: If you enjoyed this quick breakdown, be sure to check outDutchinvestors.com, where we have a much more in-depth and better premium analysis on Heiko by Bauk and Matthijs, and they explain it way better, way more in depth than I can.
8:45
SPEAKER_00: Have a beautiful day, and as always, stay curious, keep learning, and happy investing.