P/E RATIO: [PASS]
The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. HEI's P/E is 29.18, , while the current market PE is 17.00. Therefore, it passes the first test.
REVENUE GROWTH IN RELATION TO EPS GROWTH: [FAIL]
Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. HEI's revenue growth is 15.41%, while it's earnings growth rate is 20.16%, Based on the average of the 3, 4 and 5 year historical EPS growth rates. Therefore, HEI fails this criterion.
SALES GROWTH RATE: [FAIL]
Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (3.26%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (9.07%) of the current year. Sales growth for the prior must be greater than the latter. For HEI this criterion has not been met and fails this test.
The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria.
CURRENT QUARTER EARNINGS: [PASS]
The first of these criteria is that the current EPS be positive. HEI's EPS ($0.49) pass this test.
QUARTERLY EARNINGS ONE YEAR AGO: [PASS]
The EPS for the quarter one year ago must be positive. HEI's EPS for this quarter last year ($0.42) pass this test.
POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: [PASS]
The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. HEI's growth rate of 16.67% passes this test.
EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: [FAIL]
Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for HEI is 10.08%. This should be less than the growth rates for the 3 previous quarters which are 16.28%, 9.09% and 0.00%. HEI does not pass this test, which means that it does not have good, reasonably steady earnings.
This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below.
EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: [PASS]
If the growth rate of the prior three quarter's earnings, 8.59%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 16.67%, (versus the same quarter one year ago) then the stock passes.
EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: [FAIL]
The EPS growth rate for the current quarter, 16.67% must be greater than or equal to the historical growth which is 20.16%. Since this is not the case HEI would therefore fail this test.
EARNINGS PERSISTENCE: [PASS]
Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. HEI, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were $0.83, $1.10, $1.28, $1.53 and $1.80, passes this test.
LONG-TERM EPS GROWTH: [PASS]
One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. HEI's long-term growth rate of 20.16%, Based on the average of the 3, 4 and 5 year historical EPS growth rates, passes this test.
TOTAL DEBT/EQUITY RATIO: [PASS]
A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. HEI's Debt/Equity (43.66%) is not considered high relative to its industry (99.84%) and passes this test.