The late Charlie Munger, partner of Warren Buffett, shaped the term Lollapalooza effect. (Photo: Freepik, Eyeem)
Charlie Munger shaped the term “Lollapalooza” effect. The Lollapalooza effect describes how unusual company success appears synergistically from various factors and can make the competitive advantage almost indestructible.
Companies that are able to combine several small competitive advantages are guarantors of success. Many small competitive advantages give scope to adapt to changes over decades and to remain innovative.
Heico- Lollapalooza with aerospace technology
The Heico Corporation is basically an industrial company that has no special features without a closer look. But if you look at the share price and the fundamental data from Heico, you quickly realize that something special must be available. Since the IPO in 1991, the share price has been increased by an average of 24.5 percent annually – and all without technological disruption or annual sales doubling.
What makes Heico so special? Exactly: there are many small building blocks that give the company a lead and reinforce each other (Lollapalooza effect).
The role of corporate culture
Heico has been managed by the Mendelson family for decades. CEO Lauran’s Mendelson and his sons have made Heico one of the most successful companies in the aerospace industry. Family -run companies are usually more successful because they are interested in the long -term success of the company and not in short -term profits.
The long -term, growth -oriented strategy of the family relies on targeted acquisitions and a decentralized corporate structure that gives the individual subsidiaries a lot of personal responsibility. This ensures innovation spirit, high employee satisfaction, efficient cost management and also the customer proximity. This corporate culture is a basic building block for massive company success compared to competitors in terms of quality, growth and profitability.
Heico focuses on the customer
The focus of all activities should always be the customer and individual needs. The customer satisfaction rate is over 95 percent. Last but not least, this is due to the flat hierarchies that allow a direct dialogue with customers. In this way, tailor -made products can be developed and a loyal customer base created and expanded.
Sustainable growth with F&E and acquisitions
Heico has clear growth goals and invests in technological innovation to improve products and expand competitive advantages. The company also pursues a disciplined acquisition strategy. Heico regularly buys profitable, innovative companies and integrate them into their own business model. These are always companies in niche markets, because these enable higher margins and differentiation from the competition.
Diversification about products, customers and markets
Another Lollapalooza module is diversification. Heico has successfully diversified in various business areas to minimize risks and to develop new sources of income. Today’s products include spare parts for aviation, electronic components, sensors and high-performance materials for the high-tech industry as well as engineering and maintenance work.
Customers include not only aerospace as well as defense and security, but also medical technology, energy and industrial companies. This strategy enables the company to be successful in a competitive environment. Heico can also have sales regionally (USA, Germany, France, Great Britain, Asia-Pacific, Latin America).
Quality is expensive – a share with premium evaluation
Heico has increased the gross margin to 39 percent over the years with average sales growth of 13 percent per year and a clear cost discipline. As a result, the profit was expanded by 15 percent annually, although regularly invested in innovation and acquisition.
The Goodwill/Equity Ratio, which is 0.81, is questionable. In the healthy target corridor, the EV/EBITDA is located with 2 for one Capital yield of 15 percent. The free cash flow margin has always been over 15 percent for a decade. The evaluation reflects the quality of Heico. The EV/Sales is 7.7 and that Course-profit ratio (KGV) at 56. However, the profit should continue to increase 15 percent and sales of almost 10 percent.
Heico Corporation: Conclusion
Heico is a prime example of the Lollapalooza effect, which consists of a mosaic of small but valuable competitive advantages. Success can be seen in the key figures, the stock chart and the very high rating.
Disclaimer:
No investment advice. No call to buy or sell securities.