Exco Technologies Limited (TSX:XTC) is trading 30% lower than it was a year ago. Is it a screaming buy or a value trap?
First, let’s take a look at its business.
Exco Technologies designs, develops, and manufactures dies, moulds, components and assemblies, and consumable equipment for the die-cast, extrusion, and automotive industries. It’s an international business with 16 manufacturing locations in eight countries.
In April, Exco Technologies acquired AFX Industries LLC, which complemented its automotive interior trim business. AFX is based in Michigan and has manufacturing operations in Mexico. It supplies leather and leather-like interior trim components to the North American automotive market.
The AFX integration is chugging along fine. AFX contributed to most of the revenue growth in the automotive solutions segment for the fourth quarter.
Compared to the same period in the previous year, the revenue for this business segment grew 50% to $117.7 million.
AFX contributed nearly 92% of that growth. Ultimately, the earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 50% to $16.6 million.
Exco Technologies’s casting and extrusion segment has been dragging down its performance. For the quarter, it generated $45.3 million of revenue, which was 14% lower compared to the same period in the previous year.
If you thought the revenue was bad, then its EBITDA was horrible. The fourth quarter resulted in an EBITDA of $7.2 million, which was 43% lower than it was a year ago.
Overall, for the quarter, Exco Technologies posted revenue of $163 million–growth of 24%–and EBITDA of $22.2 million–growth of nearly 1.4%.
Although Exco Technologies is a cyclical company, management has been committed to paying its dividend throughout the ups and downs of the cycle.
In fact, it has hiked its dividend for six consecutive years at a compound annual growth rate of 23%. So, its dividend is 250% higher than it was six years ago. Its last dividend hike was 16.7% higher than it was a year ago.
At $10.15 per share, the company yields almost 2.8%. Being conservative and using last fiscal year’s earnings, which are expected to be lower than this year’s earnings, the company’s payout ratio would be less than 24%. So, its dividend remains well covered.
The question is how big the dividend hike will be in the first quarter. If slower growth persists, shareholders should be prepared for a token raise.
Exco Technologies is a well-run company with low debt levels. It has maintained a return on equity of more than 15% every year since 2012, and it has increased its dividend at a tremendous rate in the past six years.
However, for the fiscal year that ended at the end of September, its adjusted earnings per share grew only 1.8%. In the near term, it will likely continue to experience a slowdown in its casting and extrusion business.
Additionally, it seems that the growth for its automotive solutions business has leveled off. Without the AFX acquisition, the business segment would have seen revenue growth of only 2.8% for the fourth quarter.
So, Exco Technologies shares could certainly head lower in the next three to six months. Whenever growth starts to pick up, its shares should head higher.
Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.
Fool contributor Kay Ng owns shares of EXCO TECH.