TIP851: HEICO Vs. TransDigm: Whose Aerospace Monopoly Is Better? w/ Kyle Grieve & Shawn O'Malley

SPEAKER_1 (0:00)

You're listening to TIP.

Kyle Grieve (0:03)

Welcome back to The Investor's Podcast, Episode 851 Today, we're pitting two of the best businesses in the entire aerospace industry against each other, Heico and TransDigm. We'll look at these two businesses mainly from two angles in quality and value.

Shawn O'Malley (0:15)

Coming into this episode, I assumed one of them would very much be the obvious choice for coming out on top. Really, the more I researched, I realized these businesses are a lot closer in terms of quality than I initially thought.

Kyle Grieve (0:28)

I think it even got close enough that we really had to nitpick at some of these more subtle nuances of these businesses just to come to some sort of conclusion.

But I will admit, the tiny edges here and there do really add up. But I think there's actually one place where these businesses aren't that close at all, and that's in the price that you have to pay for them.

Shawn O'Malley (0:44)

That's right. One of them trades like the market already knows it's a much better business, and the other is priced like it's just fine. So the real question today isn't only which business is better, but which business would make the better buy today?

Kyle Grieve (0:58)

Let's find out.

SPEAKER_1 (1:03)

Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities.

We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your hosts, Shawn O'Malley and Kyle Grieve.

Kyle Grieve (1:49)

If you caught our YouTube live stream on Sierra Quarters last month, you caught a sneak peek of where this video today is headed. So we concluded in that conversation that Heico was a higher quality business than TransDigm. But we didn't really dig into specifically why that is. Given that both of these companies are very, very good businesses, I thought it'd be a great exercise to examine these two aerospace monopolies in much greater detail.

Shawn O'Malley (2:11)

We've covered TransDigm on the show before, and I definitely saw why the company is beloved in many quality investing spaces. But I admittedly have not looked into Heico with as much detail. I think just generally, I've seen the aerospace industry as being really well beyond my circle of competency.

That's certainly no excuse though for not trying to better understand it, especially when you have some great companies like TransDigm and Heico in it.

Kyle Grieve (2:39)

Yeah, and to be honest, I think I've held a very, very similar bias to you there, Shawn.

One of the first publicly traded companies I ever bought was Air Canada. And while I still actually use that business very heavily today because of all the points that I get with them, I actually have zero regrets about selling that business at a profit because, you know, kind of as you already know, airlines for the most part are simply just not good businesses. But when it comes to these businesses like Heico and TransDigm, I think I probably allowed that bias to maybe bleed into the entire aerospace industry, which is definitely a mistake because, man, many of these businesses that make and maintain planes and, you know, their parts or components, they're just cash cows.

So, you know, three of Heico's named competitors are General Electric, Pratt & Whitney and Rolls Royce. And they are all just minting cash because they are the three companies that really make jet engines for the entire aerospace industry. GE Aerospace has 27% profit margins in the last six months, just to give you an idea of just how profitable the industry is. And both Heico and TransDigm has very nice profit margins as well. You know, not quite as high as GE Aerospace, but still very solid with Heico coming in around 18% and TransDigm producing profit margins of about 21%.

Shawn O'Malley (3:49)

So, I think the message here is pretty clear. The margins on these businesses making airplane engines or parts is clearly very high. It doesn't resemble what actual airlines earn economically. So, I think I can speak for both of us when I say this is an industry that definitely deserves a closer look than we've been able to give it.

Kyle Grieve (4:11)

Well, you know, I don't think we should beat ourselves up too badly after all. There's only so much time in the day. And I guess, you know, if I'm being completely honest here, if I had to attempt to tell you what parts, you know, there are inside of an aircraft engine or how it works, my answer would approximately be, I haven't got a clue. So, you know, I just want to be upfront about that. If there's one thing that I've learned about investing over the years, it's that you don't necessarily have to be, you know, a PhD in the inner workings of a business, just to understand if the business would make an actually good investment. So what you really need to know is whether that business can sell more and more products and services in the future.