How to attack a competitor who can't fight back

Today, I'm digging into HEICO Corporation (HEI).

This one pairs naturally with my last report on TransDigm (TDG). Both companies sell proprietary aerospace parts with recurring aftermarket demand, and both had their stocks perform greatly over the last decade. But they do run opposite financial playbooks.

TransDigm runs ~60% gross margins with 6x leverage. HEICO runs ~40% gross margins, keeps leverage under 2x, and funds its growth mostly from cash flow.

So what does HEICO do? They make FAA-approved replacement parts for jet engines and aircraft, provide repair and overhaul services, and build specialty electronics for defense, space, and medical customers. The core business is designing approved copies of OEM spare parts and selling them 30-50 percent below OEM prices.

The major contrast in their business models is that they sell very few sole-source parts, versus that being the primary business model of Transdigm.

A few things that stood out to me:

• This industry has some interesting competitive dynamics. Engine makers sell engines cheap (my research tells me that new aircraft engine margins hover around break-even) with the plan to earn it back over the next 25 years on high-margin spare parts. HEICO undercuts those parts by 30 to 50 percent, and the OEMs can't match that price without having to rethink their whole business model.

• Revenue doubled in three years, from $2.2B in FY2022 to $4.5B in FY2025, split between organic growth and a steady stream of bolt-on acquisitions.

• It's still family-run. The Mendelsons control the company through dual-class stock, and subsidiary managers own minority stakes in their own units rather than the parent. But it's not all clean and perfect:

But it's not all gumdrops and lollipops.

• Gross margin slipped from 42.5% in FY2022 to 39.8% in FY2025 as the lower-margin Wencor distribution business got folded in.

• Net debt jumped from $165M to $2.3B to pay for Wencor in 2023. They've paid it back down toward $2.0B but debt can be a slippery slope. Once you are down the path of debt-fueled acquisitions, it can be hard to resist doing more. It'll be interesting to see what they do going forward.

The key takeaway for me here is that they compete in a very interesting industry. They are able to attack higher-priced competitors who have essentially backed themselves into a corner of having to fuel their business models with these higher-margin parts sales.

This is a dynamic that I've come across in situations that I'm guessing you have too. Like buying ink for our printers. 🤬 But in all honesty, I haven't spent a whole heck of a lot of time thinking about the opportunities it gives for smaller suppliers to undercut the bigger OEMs.

This has been eye-opening for me, and I'm going to keep my eye open for other industries where this dynamic exists.

With that, I'll see you on Saturday!

Nick

P.S. Next Monday, my first hire at Harvest Profit, Jaryd Krishnan (a kick ass engineer), and I are going to drop a workshop that I think you may be interested in.

Jaryd and I led a tiny team at Harvest Profit (acquired by John Deere in 2020) that was able to outcompete those that had teams 10x the size of ours and had raised 100x or more the capital that we raised. The opportunity to do big things with a small, smart crew of people (or just yourself) it's as great today as I've ever seen due to the explosion in next-generation tech tools. We're going to help you learn how to leverage them in your work.

TL;DR

• HEICO is a $49B aerospace company that makes FAA-approved replacement parts for jet engines and niche electronics for defense, space, and medical customers.

• It makes money two ways: the Flight Support Group (about 69 percent of sales) in parts, repair, and distribution, and the Electronic Technologies Group (about 31 percent) in specialty electronics.

• FY2025 revenue hit $4.5B, and Q2 FY2026 set records with net income up 49 percent, driven by organic growth plus four acquisitions.

• The financial profile: roughly 40 percent gross margins, 23 percent operating margins, $861M of free cash flow, and 1.6x net-debt-to-EBITDA.

• The stock has compounded roughly 945 percent over ten years and beat TransDigm over that stretch, though its +7.7 percent last year lagged nuclear-and-naval-heavy Curtiss-Wright.

• Operator lesson: owning an approved, hard-to-replicate position in someone else's cost base is a quieter and more durable moat than owning a brand.

The 30,000-Foot View

HEICO does two things under one roof. The Flight Support Group (FSG) designs, gets FAA approval for, and manufactures replacement parts for jet engines and aircraft, then distributes and repairs them. These are called PMA parts (Parts Manufacturer Approval): same function, fully legal, meaningfully cheaper than the OEM version. Airlines buy them because spare parts are a brutal line item, and once a HEICO part is qualified into a carrier's maintenance program, it tends to stay there.

The Electronic Technologies Group (ETG) makes specialized electronics: electro-optical and infrared testing gear, power conversion units, RF and microwave amplifiers, shielding, and safety items like emergency locator beacons. These go into defense, space, medical, and other high-reliability markets where getting designed in early means you ship for the life of the program.

What ties it together is the HEICO model. The company runs a decentralized collection of businesses, buys more of them constantly, and leaves management in place with a minority ownership stake in their own subsidiary. That structure keeps founders motivated to keep building rather than cash out and coast. It's the engine behind revenue doubling in three years.

Revenue mix (FY2025):

• Flight Support Group: ~69%

• Electronic Technologies Group: ~31%

• Corporate and eliminations: ~-1%

Revenue by geography (FY2025):

• North America: ~62%

• Non-US: ~38%

Key Stats

• Market cap: ~$49B

• FY2025 revenue: $4.49B

• FY2025 gross margin: 39.8%

• 1Y total return: +7.7%

• Employees: ~11,100

• Industry: Aerospace & Defense

Company History

• 1957: The business that becomes HEICO is founded in Florida, with roots in Heinicke Instruments.

• 1980: Lists publicly. The company is a small aerospace and industrial player for years.

• 1990: Laurans Mendelson leads an investor group to take control. This is the real starting line for modern HEICO.

• 1990s: Builds out the PMA parts business and starts the decentralized acquisition strategy that defines the company.

• 2000s: Sons Eric and Victor Mendelson take the reins of the Flight Support Group and Electronic Technologies Group. The dual-class structure keeps the family in control while funding growth.

• 2010s: Dozens of bolt-on acquisitions across FSG and ETG, with the stock compounding at north of 20 percent a year.

• 2023: Buys Wencor Group for about $1.9B in cash plus stock, its largest deal ever. Wencor was HEICO's biggest PMA competitor with more than 6,000 approvals. Net debt jumps to $2.3B to fund it.

• 2026: Q2 sets records, with net income up 49 percent and operating income up 41 percent. Closes four acquisitions in the first half, including Ethos A&C in gas turbine repair and 80 percent of Sherwood Avionics.

Show Me the Money

Standout financial features:

• Revenue doubled from $2.2B to $4.5B in three years, roughly a 27 percent compound rate, blending organic growth with acquisitions.

• Gross margin drifted down from 42.5 percent to 39.8 percent, mostly from the Wencor distribution mix, but operating margin held and ticked up to 22.7 percent. Scale is offsetting the mix drag.

• The balance sheet tells the Wencor story in one row: net debt went from $165M in FY2022 to $2.3B in FY2023, and they are already paying it down.

• Free cash flow hit $861M in FY2025, up from $436M in FY2022, which is what lets them keep buying without straining the balance sheet.

Financial Data

The TransDigm Comparison

Both companies own proprietary, sole-source aerospace parts with recurring aftermarket demand. The difference is entirely in how they are financed and priced.

TransDigm pushes pricing harder, runs EBITDA margins in the low 50s, and layers on roughly 6x leverage, which is why its book equity is negative after years of debt-funded special dividends. It paid about $1.6B in interest last year alone. HEICO takes the softer version: lower margins, under 2x leverage, positive equity, and growth funded mostly by cash flow.

The aggressive one did not win the stock race. Over ten years HEICO returned about 945 percent versus TransDigm's 626 percent, and over the past year HEICO was up about 8 percent while TransDigm was down about 16 percent. The lesson is not that leverage is bad. It is that a great model run conservatively can beat the same model run hot, especially when rates rise and heavy interest costs start to bite.

Stock Performance

1-year peer comparison:

HEICO beat its closest business-model twin by roughly 24 points over the year, but got left behind by Curtiss-Wright, which is riding a wave of naval and nuclear defense spending. HEICO's steadier aftermarket demand does not spike the way defense-platform names can, which cuts both ways.

Peer picks: TransDigm (TDG) is the near-identical proprietary-aerospace-parts compounder Nick asked to compare, useful because the business model matches but the financial model does not. Curtiss-Wright (CW) is a cleaner-balance-sheet aerospace and defense components maker with heavy naval-nuclear exposure, included as a same-sector name on a very different demand cycle.

The N.O.O.B. Nine - Competitive Powers

The Nerd Out on Business Nine is made up of Hamliton Helmer's famous "7 Powers" of competitive advantage (Scale Economies, Network Economies, Counter-Positioning, Switching Costs, Branding, Cornered Resource, and Process Power) combined with two of my own (Data Flywheel and Distribution Advantage).

Average Score: 3.2/5 - a moat built on scale, switching costs, and a sharp counter-position against the engine makers, all executed through a disciplined acquisition machine.

Memorable Marketing

HEICO does not market in the campaign sense. It is an engineering-and-relationships company that sells to procurement and maintenance departments, so the marketing is trust, track record, and the savings math.

Notable tactics:

• The savings story (ongoing): HEICO leans on a simple, repeatable message that its parts save airlines money without sacrificing safety or approval status.

• Founder alignment as a sales tool (ongoing): The model of letting acquired managers keep equity in their unit becomes its own recruiting and deal-sourcing pitch. Sellers know they are not just cashing out into a corporate machine.

• The Mendelson long-game reputation: Decades of consistent execution have made HEICO a name that quality small aerospace businesses want to sell into.

Tactical takeaways:

1. When you sell to engineers and finance teams, lead with proof and math, not brand voice.

2. Turn your ownership structure into a story that sources deals and talent.

3. Consistency over decades is itself a marketing asset. Reputation compounds.

4. A clear, quantifiable value prop (we cost 30 to 50 percent less, fully approved) travels further than any tagline.

AI Uses & Opportunities

Current exposure:

• HEICO is a supplier into AI-adjacent hardware more than an AI story itself. ETG sells electronics into defense, space, and high-reliability systems where compute and sensing demand is rising.

• Reverse-engineering and qualifying PMA parts is heavily technical work, and modeling, testing, and materials analysis are natural places for machine learning to speed things up.

Future opportunities:

• Use AI to identify which OEM parts are the best PMA candidates, ranking by volume, margin, and approval difficulty. That is a direct lever on the growth engine.

• Computer-vision inspection in the repair and overhaul business to cut scrap and speed turnaround.

• Predictive analytics on aftermarket demand to optimize distribution inventory across the enlarged Wencor footprint.

• AI-assisted diligence to screen and integrate the constant stream of bolt-on acquisitions faster.

Bumps in the Road

• Margin mix pressure. Folding in lower-margin distribution and repair keeps nudging gross margin down even as the business grows. The trick is holding operating margin, which they have so far.

• Acquisition dependence. A meaningful chunk of growth comes from buying companies. That can get messy, prices can rise, and integration is never free.

• The balance sheet is no longer bulletproof. Leverage ticked up again in early FY2026 to fund four deals. Still modest versus TransDigm, but worth watching.

• Cyclicality of air travel. The aftermarket is more stable than new aircraft sales, but a serious downturn in flight hours would still hit parts and repair demand.

• Key-person and family control. The Mendelson family and dual-class structure have been a huge asset, but concentration of control is always a governance question for outside owners.

Your Swipe File

• This is another example of the power of being specced into a complex bill of materials.

• Attack your competition where they are weak. High-priced parts presented a unique opportunity for them to attack.

• I love how they let the subsidiary owners maintain equity in their subsidiaries and not just the parent. This helps incentivize builders post-acquisition.

• A great business model run conservatively can beat the same model run at maximum leverage. Being antifragile is a strategic choice I like.

• Serial acquisition works best as a repeatable system, not a series of one-off swings. The playbook can be valuable and hard to replicate IP

• When your value proposition is a number, sell the number.