HECO has superior business quality and alignment but trades at ~50x earnings which is too expensive to own today; wait for a 10-20% pullback.

Nearly every single component that Hiko sells has been approved specifically by the FAA. So I think the simple way to think about this is that Hiko is like maybe the generic drug company of the aerospace industry.

They sell a product that is something like the functional equivalent of the original equipment manufacturers component, but they do so for a really steep discount. And the FAA is like this governing body that decides whether their components are up to par, basically.

And then this approval process can take anywhere from 2 to 5 years, depending on the complexity of the part involved. Right, exactly. I think that's the perfect metaphor. And you can get the idea there that the time that it takes is obviously a big part of the advantage as well.

So the cool part about Hiko is that they don't outright copy the parts. They actually are designing it and having to engineer it themselves as well. And this probably explains why they're able to reduce the price on it while still making some very, very high margins.

So the second part of business is called the Electronic Technologies Group. This part of the business deals more with things like niche electronics. Think of devices like laser rangefinders used in military targeting systems, or amplifiers and antennas that send and receive radio signals all the way to backup power supplies or even power conversion kits.

They sell a very wide range of electrical components, and this part of the business accounts for the remaining 33% or so of its revenues.

Both of the segments have a large aftermarket parts business, but from what I can gather, the flight safety group offers much more in aftermarket sales compared to the electronic technology group.

Well, that's a tough question, because when you strip away the details, it does seem like the two businesses are remarkably alike, right? They both lean heavily into the the aerospace parts aftermarket, with well over half of the revenue coming from parts that have to be replaced during an aircraft 30 plus year life cycle. So a lot of overlap there.

And they both kind of grow through a mix of organic growth and acquisitions, and they both enjoy some regulatory protections and barriers to entry that make it hard for new competitors to come in and get a part certified.

whereas Hiko comes in with an FAA approved alternative and they're basically trying to cut costs, right. Their prices are deliberately maybe 30 to 50% below the OEM.

So I think I like that business model better. If I had to pick, I would probably lean toward Hiko. When you're pitch to customers is the same quality at a much lower price. They're going to be very happy to keep buying from you, and probably to do so for a long time.

And every new part you get approved, wins more business because you're saving the airline money rather than charging it more than you otherwise would. So it's kind of a win win win all around.

And yeah, it just it strikes me as being much more sustainable.

But the aerospace industry in which Hiko operates clearly does not sell commoditized products due to the high barriers to entry. So while I do think it's compelling, I'm still not sure if it's more compelling than the pricing power advantage Trans I'm offers.

So looking at the M&A history of both companies, Heiko has done 113 acquisitions over about 35 years. And so that's an average pace of a little more than three acquisitions a year, which is not actually that high of a number for a business that gets labeled as being a serial acquire.

And it is worth noting that this year in particular, though, has been pretty active. So they've done six deals in 2026 already. So we can actually take a look at Heiko average deal size just this year.

So as you already mentioned they bought about six businesses worth total considerations of about $1 billion. So that puts the average deal size at about $175 million apiece.

Now I was a little disappointed with the disclosures of their acquisition criteria. But here's what we do know. So they focus on acquiring approximately 82, 100% of the target business.

And they do this because it allows the existing ownership group to continue having some skin in the game. So we can tell from older earnings calls that they do have a set of three criteria.

When they're looking at a potential acquisition. The first one is that they're just fairly priced. Second, they are a very good business with strong barriers to entry. And third, they want superior leadership teams that they'd be happy to work for for the next three decades.

Victor Mendelson, the co-CEO of Heiko, along with his brother Eric, has said they generally look for businesses with about a 20% operating margin and then a return on investment of about 20 to 25%.

So you can see there in the point that they made about management, that not only is Heiko long term, but they also want to partner with people who are also long term.

So this all sounds pretty good. And especially when you think about the runways that these businesses have, the acquisitions, when done correctly, should provide a ton of value whether they grow or not, simply because they sell a product that will be in demand for decades with very little competition.

And so, yeah, that's a very, very nice business model to have.

Yeah. So the number that I've seen quoted is that they've been successful about 98% of the time on these acquisitions, meaning there's probably two acquisitions out there that were considered unsuccessful.

Now, I'm not exactly sure what that means. Maybe that means they were a complete zero, or maybe they were able to steal extract some sort of value from them during their lifetime of eventually becoming, you know, worthless.

But either way, it's a very, very good track record.

And so having that reputation of treating the businesses that they take over well, I think can help Heiko win deals without always being the highest bidder.

So just to put some numbers around that, for context, Hiko median net debt to EBITDA or EBITDA is an operating earnings proxy. It's about one times. So their net debt is just one times multiple of their operating earnings.

Yeah. I mean, I think it's kind of impossible here not to give the edge in terms of debt to Heiko when you account for trans dime's kind of bond, villain size debt pile.

versus a business such as Hiko, which prides itself on never having any parts failed during their entire lifespan.

Whereas for Hiko, the high cost of failure was actually the hurdle it had to clear first, and so it had to earn trust as a credible alternative to the original equipment manufacturer.

1FA approval at a time. But once it did, those same barriers started working in its favor because anyone trying to undercut Hiko, well, now they have to run into that same wall of of skepticism and review.

So transform benefits from these barriers by default. Well, Hiko sort of earned its way inside of them. And to me that makes the businesses position more durable.

It's really important. Like you just said, that Hiko essentially worked their way into that. And one of the ways they did that was basically by partnering with Lufthansa. So and since that time, they've done that with a multiple other airlines as well.

So I think they've done a really, really good job of building their own loyalty kind of from scratch, which is I think very, very commendable.

Then, you know, if you're looking at Hiko, whether you want to call it process power or a low cost provider, they are just manufacturing these parts at lower prices than they OEMs.

And I think this is super powerful since they had this long history with no major accidents. Their customers know and trust parts that come from a high subsidiary, and getting it at a steep discount is nice, especially since these OEM parts are very, very pricey.

And so if I had to give an edge, maybe my biases are showing again, but I would probably go with Hiko. And that's because I tend to like businesses that again, just can price their product better than competitors, while not really having a ton of competition.

And so haikus advantage works the other way. Every time it wins a sale, the customer saves 30 to 50% versus the OEM. So airlines actually want Hiko to succeed and keep adding new parts.

And Lufthansa even owns a stake in part of high goes aftermarket parts business to show sort of their alignment there. And that just makes me more confident. Haikus moat can keep widening over time without inviting regulators to really intervene.

And when we first did our live stream on See Requires, I also picked haiku as well. But now you know, I'm just not so sure.

But overall, you know, I think I completely agree with you, Sean. You know, I prefer as little meddling as possible with regulators. So I think I would give Hiko the edge here and competitive advantages.

But I do think it's a very small edge. It's almost like asking me if I prefer, you know, an orange sunset or a pink sunset. They're both very, very good. And it's just up to personal preference.

But let's get to haikus management here. Very similarly I think haikus management is very well aligned. I think they have a really, really good incentive system that's pretty hard to beat in my view.

So first let's get to management here. Heiko was and still is primarily a family run business. So Lawrence or Larry Mendelson passed away last year, but he was still the company's executive chairman until he passed away at the age of about 87.

His legacy, however, lives on in his two sons, Eric and Victor Mendelson. So the brothers have been part of Heiko since 1990, and both have worked in a number of different roles as they moved up the corporate ladder, where they are now co-CEOs, and the heads of the Flight Support Group and the Electronics Technologies Group.

And so you can see this directly in the Heiko and transom comparison. Heiko insiders own nearly 19% of the company's stock, and that provides a lot of alignment with shareholders, all the other shareholders, since insiders are also the largest shareholders of the company, and the Mendelssohn family alone owns the lion's share of that sake.

And so I just I really love seeing that kind of insider ownership dynamic.

Yeah. Me too. And that's really just the start of what's to love in my view, of high incentive program. So Heiko considers all employees to be team members. And as such, they've tried to create as much alignment inside the company as possible right from the beginning.

I think they knew how important their team members are to the success of the entire business, and therefore they've helped fund the team members 401 to improve alignment even more outside of just the executive and directors.

But what I think Heiko really, really shines is in the incentive structure. So even though we like to dunk on EBITDA, it is part of the three metrics that they do use to judge performance.

So you may think, well, that's unfortunate, but they also focus on things like net income to Heiko as well as cash flow from operations. So for 2025, the target bonus required about 10% growth in each of these three financial metrics to unlock the bonus.

Now, it's really nice to see a business focus on these metrics over just,

the edge to Hiko as the leverage issue just doesn't seem to be much of a concern for them. And then also having the risk of having deals blocked is also much lower, I think, when it comes to Hiko.

But I will say I think both these businesses carry pretty low risk. I'm really just nitpicking here.

Yeah, I agree, I, I think I'm finding myself to to favor hikes business model and seeing it coming with with less risk. But the one caveat I'd add is that with Hiko the bigger risk is is the price you pay in the stock markets.

And so the market already knows how good it is. And we'll get to more of that shortly.

I think that's a pretty fair assumption. And Hiko revenue is about half that of trans lives, meaning their market share is even lower. So I think Hiko still has a very long runway to go on the M&A side of thing.

Then on the organic side, Hiko also adds parts to its list of its already 20,000 components. So they've stated that they intend to add somewhere around 300 to 550 new parts annually.

Some of this growth will come from M&A, but much of it also comes from just re-engineering existing parts in-house. But it's kind of hard to get organic growth numbers for Hiko.

The other issue is that post-Covid rebound numbers have definitely inflated the organic growth, and they are unlikely to remain elevated in kind of the low double digits that they seem to be.

If I had to guess forever. So Barclays set a number that Clay pointed out at around 7% to 10% organic growth for Hiko. And that seems directionally correct to me. Now,

there's one thing that I have to mention here, which is that the actual Tam for both of these business is likely actually a lot larger than I painted. And that's because they both serve military applications, spacecraft as well as other industries.

It's a good point. And that could be where more future growth comes from. Once they feel that they have less M&A opportunities, specifically in the commercial airlines industry.

And overall, I, I think it's a pretty even split here when we compare these two companies. I'm not sure I can really give an edge to to either with the Thames being pretty similar overall.

Maybe Hiko gets a slight edge just because they have less revenue, so they have smaller acquisitions that they can do that moves the needle for them still. And there may be more of these small companies that they can can find to acquire than, than transform would, would bother looking at. But that is really just purely speculation.

No, I mean, that's a really good point, though. Small cereal choirs do have that advantage until they scale up. But you know, given the average acquisition size for Hiko is already $175 million over the last year.

I think they aren't really doing small acquisitions by any means, so I'm not sure it's a huge edge, but I think I agree it's really hard to give one company an edge when it seems like they both fulfill their own kind of small niche, and can grow that on niche over time.

Just looking at these two companies, it's pretty hard not to admire them both. I think Hiko has gained an edge, big or small, in many different categories, so I probably give them the edge in terms of business quality.

But as we both say to today, we have nitpick a lot and a lot of the edges that we granted to Hiko, in my opinion, were razor thin.

So in my view, these are both exceptional companies. I personally would have no issue owning either or both of them in intrinsic value as well as my personal account. But the problem with these businesses is that the market also knows they are ridiculously high quality.

So as of today, Hiko trades at an EV to EBITDA of about 30 times and transform trades at about 18 times EV to EBITDA.

But what kind of intrinsic value did you come up with for Hiko? Yeah. So with Hiko. In my base case, I assume revenue continues to grow at about 14%. This allows the business to grow organically as well as through M&A.

Now with how bumpy M&A can be on a yearly basis, it's great that they still have this very nice organic growth number that they can rely on when the M&A pipeline kind of slows down.

From there, I apply an EBITDA margin of about 30%. This allows for continued operating leverage. This business has really consistently grown its EBITDA margin. It's been quite impressive.

And with cost discipline, I don't really see that stopping anytime soon. So I allowed it to continue expanding a little bit, and then after that I just apply a 28 times EV to EBITDA.

Multiple. Yes, this may seem rich, but the median multiple over the past decade is 35 times, so I did want to give it a multiple. That seems somewhat realistic. If growth rates and margins are stable.

I don't see much of a reason to discount this too heavily. And with that, I get a price of about $550.

How about you walk us through how you think about the intrinsic value of Hiko, and you also count for the bull in the bear cases? Yeah.

I think the downside and upside to this business aren't that massive in either direction, which is partly the beauty of this business and why it has kind of this premium multiple.

It is really shown resiliency which helps cap the downside. And the upside is also not massive as they can't all of a sudden really go out and make 3 or 4 times as many acquisitions as usual, which would drive a ton of organic growth.

So if I apply my bear and bull thesis and a 20% margin of safety, I get an intrinsic value of about $354. But this only yields about an 8% return, which is below the 12% hurdle rate for the intrinsic value portfolio.

I will say that I'm very, very impressed with both of these companies. I think Hiko gets the edge in quality, which is why it has that premium multiple, but I'm not sure it deserves quite that high of a premium over trans dime.

So my view here is probably that we just watch Hiko closely. If the price drops another 10%, 20%, I could see myself getting really interested in adding shares. Yeah. I'm right there with you.

And if I could only own one of these for the next 20 years, I would probably take Hiko. Because the more you zoom out, the less the multiple you pay today can matter. And so it has the business model I like more.

It has the stronger balance sheet and is a family that's just about as aligned as you could wish for as a shareholder. But at roughly 50 times earnings, I just can't justify buying it at today's valuation.

I'm too greedy. I, I'm, I'm hoping that we can get a more reasonable price on it. So Hiko is is definitely going on my watch list for now. And if the market ever gives us a better price, I'll I'll be ready to take a much closer look at it.