Investor Dialogue: HEICO, Transdigm, & Terminal Values

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Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

One of the first questions I had was, how did you choose to invest in one or the other share classes?

Analyst 1: For me, it was just a matter of trusting the Mendelsons and being content with the A shares, even though they don’t vote as much. When I bought them, they were significantly cheaper. To me, it didn’t make any sense to pay up for more voting rights.

Analyst 2: Voting rights is something that directed me to go towards the regulars, as opposed to A. We own both; more regular than A. As you may know, A got created as a result of a failed acquisition and they have never been able to go back to collapsing the two, primarily for tax reasons. That is the same reason why I don’t invest in any ADRs or GDRs; I want to be able to own the equity and own the voting rights.

So you own mainly the voting shares?

Analyst 2: Yes.

How much more expensive have they been, on average?

Analyst 2: The spread between common and A has been fairly steady, even today. What do you see as A?

Analyst 3: It’s roughly a 20% spread right now.

Analyst 2: Yes; it’s been fairly steady like that.

Analyst 3: Historically, the spread has been around 20%, 25% and then, during Covid, the spread collapsed and actually went negative. There was a really interesting arbitrage move where, essentially, sell all your As and buy all the traditional. Literally, by the end of the day, there was a 50% premium being reassigned to the As. From there, you could sell all of your voting stock and end up having a 15% larger position, less taxes, in your A. Historically, it was around 20%, 25%. Before Covid, it started collapsing closer to 10% and then it went negative and now it has re-expanded out.

The reason why it happened in Covid was, on that day, there was a fund that was blown out of position. The voting stock is more held by active managers. I have alerts set for the spread.

Analyst 2: Remind me again, does Greenhaven own HEICO, or not yet?

Analyst 3: No. There is no economic difference between the two ships. Chipotle did this, back in the day. Back in 2008, 2009, they had two share classes but, essentially, economically, they were the same. Obviously, Berkshire split; it’s the same. Although there is an interesting arbitrage there because you can actually convert. You can’t do that with HEICO, which would be really interesting.

In the end, I don’t think, personally, if I held a huge chunk of the voting class, I would change anything that they are doing.

20% just seems like a huge spread to me, especially with this company where the whole thesis is that you trust the management because they are allocating capital and they have got a track record. It doesn’t make intuitive sense for it to be such a big discount.

Analyst 3: It doesn’t make any sense. It is difficult to arb out. You can do it, with some companies, but there is no reason why that spread has to change. If you think, for the holders of the voting class, what is their cost basis and where would the premium have to go before they would be willing to sell those and buy the As? Again, if it was convertible, like Berkshire, you could arb that all day long and there is actually an interesting play you can do with Berkshire, with that, right now. It just takes a lot of capital.

I don’t know why it does it. I don’t think it’s rational for it to do it, because I don’t think holding those votes is really going to the change the outcome of the intrinsic value of the business, because it’s well run.

It’s different if you want to have some kind of right. But the whole thesis around these companies is that you trust the family and the history.

Analyst 3: I think it ultimately corrects, later. This will go to the business and their ability to retain capital and compound it at high internal rates. If that ability starts diminishing, then they have a very attractive spot where they can deploy repurchases. Let’s say the voting class are the ones that are perfectly valued and the As aren’t; you’re immediately getting a 20%, 25% discount on the business. Right now, they can retain all the capital and compound it at higher rates of return.

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