Two LKQs of the airline world are HEICO Corporation (NYSE:HEI) and TransDigm Group Incorporated (NYSE:TDG). TransDigm Group Incorporated (NYSE:TDG) is a bit of a hybrid: they’re the OEM for many airplane components, but they also sell refurbished versions as aftermarket products. HEICO Corporation (NYSE:HEI) sells only aftermarket components.
The ace in the hole for both companies is that all non-OEM airline parts have to be certified by the FAA as being “as good or better than” their OEM equivalent. This means there are very few companies working in this industry. In fact, 75% of TransDigm Group Incorporated (NYSE:TDG)’s sales come from parts for which it is the only supplier! This monopoly equals stability. HEICO Corporation (NYSE:HEI) also has an excellent track record of having its after-market parts approved by the FAA, so its cheaper parts are an equally safe alternative for cash-strapped airlines.
But is it worth it?
Still not convinced? Check out the chart below. I’ve charted the past five year’s stock prices of Ford Motor Company (NYSE:F), Boeing, and Southwest Airlines Co. (NYSE:LUV) alongside the three parts companies (LKQ, TransDigm, and Heico) that I’ve outlined today.
Five-year price growth
The partsmakers — especially TransDigm — are showing remarkable growth compared to their fellows (not surprising, as they’re much smaller). However, even after this growth, Trailing Twelve Month P/E ratios for all three are only in the mid-20s, which I think is reasonable for small companies with excellent “razor-and-blade” revenue models and growth prospects. Cautious investors take note however: all three companies have very high debt ratios, the result of growth through acquisition. In the current climate of low interest rates and taking into account the companies’ many positives, this doesn’t bother me. However, if interest rates rise, debt could be a cause for concern. For now, though, I see a long road/runway ahead for all three.
The article 3 Spare Parts Plays to Rev Up Your Portfolio originally appeared on Fool.com and is written by John Bromels.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.