Pat McKeough recently replied to a Member of his Inner Circle who asked whether a Canadian stock that specializes in auto parts rates a buy, sell or hold.
Exco Technologies has two business segments, with automakers comprising the bulk of its clients. The company has grown by acquisition, and Pat notes that its low debt and strong cash flow should let it continue to expand. Nonetheless, he adds, the company’s growth also depends on favourable industry trends in North America and Europe—and could be hampered by changes in trade rules between Canada and the U.S.
Q: Hi Pat, what is your opinion on Exco (XTC). Is it a buy, sell or hold?
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A: EXCO TECHNOLOGIES LTD. (symbol XTC on Toronto; www.excocorp.com) operates in two segments: Automotive Solutions, and Casting and Extrusion.
Exco’s Automotive Solutions business designs and makes plastic trays and blow-moulded cargo organizers for automobiles. It also offers storage and restraint systems, injection-moulded consoles and gearshift boots. In addition, it cuts and sews seat covers and headrests and makes instrument panels, sun visors and door panels. The Automotive Solutions segment accounted for 69% of Exco’s revenue in 2017.
The Casting and Extrusion business designs and makes diecast and extrusion tools as well as parts for aluminum diecasting and extrusion machines. This business segment also gives production and technical advice to extruders and manufacturers working with diecast forms. The customers for its Exco business are mainly automakers, but include industrial firms. The Casting and Extrusion business accounted for 31% of the company’s overall sales in 2017.
Based in Markham, Ontario, Exco was founded in 1952.
Its revenue increased 138.8%, from $244.6 million in 2013 to $584.2 million in 2017 (fiscal year ends September 30).
The company’s earnings climbed 101.7%, from $0.58 a share (or a total of $23.6 million) in 2013 to $1.12 a share (or $47.6 million) in 2016. Earnings then tailed off 10.7% to $1.00 a share (or $42.5 million) in 2017.
Exco’s revenue growth has mainly come through acquisitions. In 2014, it purchased Automotive Leather Co. for $26.4 million in cash and shares. That firm makes leather seats and trim for BMW and other European carmakers at a plant in Bulgaria. In April 2016, the company paid $73 million U.S. for AFX Industries. That operation makes leather trim components at plants in Michigan and Mexico.
Growth stocks: Dividend appears safe and yields 3.6%
In the three months ended December 31, 2017, revenue dropped 12.0%, to $134.8 million from $153.1 million a year earlier. Earnings decreased 1.9%, to $8.9 million, or $0.21 a share, from $11.5 million, or $0.27 a share. The decrease in revenue was largely due to the strategic closure of a plant in South Africa that Exco acquired as part of its acquisition of Automotive Leather Co.
As of December 31, 2017, the company’s long-term debt was $31.2 million, or a low 7.7% of its market cap. Exco also held cash of $33.6 million, or $0.79 a share. Overall, the company is in a good position to continue expanding.
In February 2017, Exco increased its quarterly dividend rate 14.3%, to $0.08 a share to $0.07. In January 2018, the company increased the dividend another 6.3% to $0.085 per share. Exco has raised that payment nine times in eight years. The shares now yield 3.6%, and the dividend appears safe.
The company’s future sales and profit will depend on the growth of North American automobile sales and European vehicle production. Exco also faces the risk of changes to U.S./Canada trade rules. However, its outlook is positive, and the stock trades at 9.3 times this year’s forecast earnings of $1.01 a share.
Inner Circle recommendation: Exco Technologies is okay to hold, but only for aggressive investors.
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