HEICO 的业务质量优于同行（杠杆更低、管理层利益一致、护城河持久），但随着市场将这一质量计入价格，其面临估值风险。

So we concluded in that conversation that Hiko was a higher quality business than trans nine, but we didn't really dig into specifically why that is. But I admittedly have not looked into Hiko with as much detail.

three of Hiko name competitors are General Electric, Pratt and Whitney and Rolls-Royce.

Just to give you an idea of just how profitable the industry is. And both Hiko and Transom has very nice profit margins as well. You know, not quite as high as GE aerospace but still very solid with high Co coming in around 18%

So these businesses are all referred to as original equipment manufacturers or OEMs. So Trans Dime does offer parts that do go into brand new aircraft. So they'll offer parts that do go into engines.

But we're trans dime and also Hiko really shine is kind of in this aftermarket section.

But let's now take a look at Hiko. So it's not too dissimilar from trans time. You know they both have organic and non-organic growth. They both made a ton of acquisitions over their lifetime.

Hiko has made more than 110 acquisitions since 1996.

So Hiko also makes parts for OEMs for new aircraft. But they have a very large aftermarket component as well. So if you add up Hiko sales of aftermarket parts as well as repair and overhaul part services, they have aftermarket revenue making about 59% of their revenue. So also quite similar to Transdev.

And so I know Hiko is broken into different segments as well. And with them, there's a segment called the Flight Support Group that makes up the majority of of revenue.

Yeah, that's completely correct. So as of the latest quarter, the flight support group makes up about 67% of revenue. Now, this segment uses proprietary technology to both design and manufacture jet engine and aircraft replacement components.

So they sell to commercial and military customers.

But here's where they kind of separate from trans time. So Hiko is very intentional about setting prices consistently about 30 to 50% below the OEM prices.

But this is only the start of their competitive advantage. So another vital aspect of business model is the regulation of its parts. So as I mentioned earlier, you can't come in with a cheap replacement part and expect anyone to actually buy it from you.

So in the US, the Federal Aviation Administration has a program known as the Parts Manufacturer approval. 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.

And because of this, it's such a revenue. Streams are very much very reliable. And for Kassel, which supports them being able to carry more leverage. But again, when you compare the two, just simply Heiko is much less leveraged.

And just to contrast that with Hiko, which is admittedly a much smaller company than trans lime, they only have $2.3 billion in net debt and a net leverage ratio around 1.6 times.

I think that's really all you you probably need to know, right when it comes to the debt situation. Again, it's just clear that Hiko is in a much safer position from some perspectives.

Hiko is obviously incredibly well positioned due to the FAA regulations, as you know, one of the few manufacturers of certain parts. But they all admit that the OEM is often the sole source for many of the parts that they developed.

So, you know, technically, they'll always have at least one competitor there from the OEMs, even if they have that advantage of selling those components that a very, very steep discount.

And then I guess Hiko is is more like LeBron for our basketball fans out there that are following along with the conversation because they win by making people around them better.

And in this case, that's by saving customers and money. And it's also built for longevity, right. LeBron is still playing to this day. It's incredibly long career. So the question for investors is whether you want that that killer instinct of Jordan or the staying power of of maybe LeBron.

And I would probably take personally the LeBron approach for business as being more attractive to me as an investor.

Yeah, I think if I had to simplify it, I think both Hiko and Trans Time offer high switching costs. So, you know, for the most part, switching is either impossible or economically unfeasible.

Sure, the OEMs can make a stink about a customer maybe using these aftermarket parts that aren't their own, but you know, if they want the customers business again in the future, they basically have to just accept that the customer is going to use aftermarket parts from a different company because they can get them simply at a much better price, while delivering essentially the exact same performance.

Now, this was unrelated to the two crashes that they had, but the FAA basically concluded that the affected parts may be susceptible to premature failure or cracks resulting from improper manufacturing process.

Although a complete failure of a leading edge slat track could not result in the loss of the aircraft, a risk remains that failed parts could lead to aircraft damage in flight.

Now we have no idea of knowing where these parts came from, other than that it was a sub tier supplier for Boeing. So any business that has a reputation like this probably is going to be a lot lower in the pecking order in the future 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.

So first let's get to management here. Heiko was and still is primarily a family run business. 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 what we know is that family run businesses do tend to offer higher returns than non-family run firms, and it's something I've seen a lot of studies on, and there's a lot of data backing up that point.

And I think there are multiple reasons for this. And basically they have more skin in the game for one, and that helps them make longer term investment decisions.

And that also probably makes them more hesitant to take on speculative debt and just generally increases their risk aversion. That leads to the to be able to to have their businesses compound with less interruption.

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, you know, vanity metrics that you see very often in something like revenue growth.

And I think it creates really good alignment, because if these three metrics are increasing by at least 10%, chances are very, very good that the share price will be up, especially if you compound that number over multiple years, which they've done exceptionally well over their operating history.

I think it is very well aligned, and what I like most is that all three metrics have to grow together. EBITDA on its own is a number that that can be dressed up and manipulated, and that's why it deserves some criticism.

But it's a lot harder to fake growth in net income and operating cash flow at the same time.

So management can't hit its bonus just by piling on debt to to buy growth. And all three metrics have compounded at roughly 15 to 18% a year for almost two decades, which really is incredible.

And so a 10% hurdle rate is a realistic bar, but one that gets harder to clear as the company grows as social reality of the law of large numbers.

And so. I also like that the alignment doesn't stop at the executive suite either. Helping fund team members 401 S gives the people building and repairing these parts every day a real reason to to think like owners.

And you pair that with the Mendelssohn family owning such a big chunk of the company, and you have a setup where management mostly gets paid when shareholders to to.

But we should mention that Heiko does approach capital allocation a bit differently from trans Simon, especially on the dividend front. They do, but I actually had a pretty big surprise when assessing this.

So if you look at Heiko disclosures, they state right there that they do pay a semiannual cash dividend. And they've been doing this for a long time since actually before the Mendelssohn's even took over the company.

But the dividend is very, very small at only 0.1%.

So me being an admirer of serial choirs, I do prefer having this number as close to zero as possible. And that's simply because the inherent business model of zero choirs is really to just allocate capital into new acquisitions, and rather that capital be put to work rather than just, you know, paying a dividend.

But when you read disclosures, they tell you that they do not pay a regular dividend, but they have made some very hefty special dividend payments over the years.

Well, it really goes without saying, but I'm going to say it anyways. Both of these companies have top notch management teams, and I had to give the edge to one. I probably again would would give it to Heiko.

I think having bonuses that cause minimal dilution and are also well aligned with.

Shareholder value is is very much music to my ears as a value investor, and I think hikers plan to get those three metrics to rise and lockstep should ensure the business continues to compound at a mid-teens rate for many years to come.

And the other piece of this for me, is how each team thinks about time. And so at Heiko, as we've mentioned, insiders own close to 19% of the company, and the Mendelssohn family has been running the business for more than three decades.

So they're effectively managing their own wealth for the next generation, which is a pretty powerful motivating factor.

Now, just to wrap things up here, I think similar to you, I'll give the edge here once again, Tycho. But the edge here is a lot smaller than I initially thought, maybe about the size of a piece of paper.

And I think given the fact that Hiko doesn't have aggressive pricing, it prices its components below the OEMs, actively helps force some sort of competition, which definitely helps keep Hiko outside of the regulator's crosshairs.

So if I'm looking at both of these businesses and assessing risk, I think once again, I'd probably give 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.