The Motley Fool

Exco Technologies Limited Is My Value Pick for the Month

Exco Technologies Limited (TSX:XTC) has been a steady, well-run company over its history, and shareholders have been rewarded with regular dividend increases. The stock has declined 28% in the last year, and I view this as a good opportunity for investors to get into a high-quality name that would be a solid addition to their income-generating portfolios.

Solid financials

In the most recent quarter, the company increased its dividend by 14%. In fact, the company has a really strong history of dividend increases. Since 2012, the dividend has grown at a cumulative average growth rate of 18% from $0.14 per share in 2012 to $0.32 currently.

Revenue increased 17% to $153.1 million, and this was due to the acquisition of AFX, which contributed $28.5 million of this increase. Exco acquired AFX back in April 2016 for US$73 million, and this acquisition is complementary to Exco’s interior trim business; management expects it to be highly accretive to earnings.

On to cash flow. The company also has a good history of generating solid free cash flow numbers. In the latest quarter, the company generated free cash flow of $18.3 million for a very attractive free cash flow margin of 12%.

Additionally, Exco has been able to achieve strong margins. In the latest quarter, the company posted an operating margin of over 11%, similar to Linamar Corporation’s (TSX:LNR) operating margin and significantly higher than Magna International Inc.’s (TSX:MG)(NYSE:MGA), which came in at 7.7% in its latest results.

Let’s also look at return on equity (ROE) — a metric investors should always look at because it shows us how effective a company is at creating profit from our (shareholders’) money. Exco Technologies ranks very well on this measure as well. In 2016, the company generated an ROE of 17.2%, which compares to Magna’s ROE of 21.8% and Linamar’s ROE of 21.5%.

Balance sheet remains strong

The company has $38 million of cash and cash equivalents on the balance sheet, a debt-to-total-capitalization ratio of 19%, and a net debt to trailing EBITDA of a very healthy 0.3 times.

Attractive valuation

The shares trade at a P/E ratio of 9.4 times with an expected earnings-growth rate (based on consensus analyst expectations) of 12% in 2017 and 13% in 2018. This compares to Magna’s P/E ratio of 8.5 times and expected earnings growth of 6% in 2017 and 9% in 2018, and Linamar’s P/E ratio of 7.6 times and expected earnings growth of 18% in 2017 and 1.2% in 2018.

Finally, Exco Technologies’s current dividend yield is a very attractive 3%, and this dividend is easily covered. In fact, the company has been successful at covering and maintaining its dividend throughout its history, despite the fact that its business is a cyclical one.

Just Released! 5 Stocks Under $49 (FREE REPORT)

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.

Claim your FREE 5-stock report now!

Fool contributor Karen Thomas has no position in any stocks mentioned. Magna International is a recommendation of Stock Advisor Canada.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.