Exco Technologies Ltd. (XTC.TO) Analysis – F2016 Update

I last reviewed Exco Technologies earlier this year, and at the time had recommended them as a buy. Exco recently announced their audited financial results for the 2016 Fiscal Year, so now is a good time to update the analysis to see if this recommendation holds.

Let’s take a look at the aggregate recommendation criteria:

Criteria Value Threshold Pass?
Strong financial condition Current Ratio 2.03 1.50 YES
Earnings Stability Number of most recent years of positive EPS 6.00 3.00 YES
Earnings Stability Number of consecutive years of negative EPS 2.00 1.00 NO
Dividend Growth Compound Annual Dividend Growth 16.57% 2.00% YES
Share Price Growth Compound Annual Share Price Growth 10.59% 3.00% YES
EPS Growth Compound Annual EPS Growth 35.25% 3.00% YES
Moderate P/E Ratio P/E 10.81 15.00 YES
Moderate P/BV Ratio P/BV 1.84 1.50
Moderate P/E*P/BV Ratio P/E × P/BV 19.93 22.50

We can review the EPS, dividend, and free cash flow metrics first, since these speak to some of the fundamental cash flow attributes of the firm:

10 year Dividend, EPS, and Free Cash Flow per Share Growth

Compound annual dividend growth for the trailing 10 years has increased from 14.88% in F2015 to 16.57% in F2016, which was accompanied by an increase in the quarterly dividend to $0.07/quarter earlier this year. EPS compound annual growth has dropped a little: in F2016 the growth is now 31.23%, down from 33.03%, using F2007 as a base year. This does not concern me, as growth is still on an upward trajectory, and as you can see from the data, free cash flow per share is growing at a healthy pace.

As an aside: in F2015 when calculating CAGR of EPS growth I used a reference year of F2005, which gave me a CAGR of 12.32% between F2005 and F2015. However, because F2006 had a negative EPS, this makes comparables difficult. For comparison purposes. I have used a CAGR from F2007-F2015 vs F2007-F2016 when comparing EPS growth rates.

The other reason I am not concerned about a minor drop in EPS growth is the dividend payout ratio:

10 Year Dividend Payout Ratio vs EPS and FCFPS

In F2016, the dividend payout ratio against EPS and free cash flow per share was 24.13% and 26.80% respectively. F2015 had a payout ratio against EPS of 23.86%, and a payout ratio against free cash flow per share of 45.78%. Even though the payout against EPS has gone up in F2016 (because the dividend rose faster (17.39% year over year) than EPS (16.10% year over year)), at 24.13% there is still ample room for dividend increases in the long run. In other words: I am not concerned about the dividend being impacted in the foreseeable future.

I remain neutral on my views of overall profitability strength:

10 Year Profitiability Strength

Revenue has been going up year over year, however the growth in that revenue has dipped somewhat in F2016 (YoY growth in F2015 was 35.31%, while it was only 18.20% in F2016). Profit margins have remained consistently above 8.00%, which is a positive sign: Exco has managed to keep profit margins above this support level for the past three years. But, with the acquisition of AFX (discussed below), I expect revenue growth to match or exceed F2016 by this time next year.

From a valuation perspective, the company is still relatively cheap:

Graham Number as of 2016

The Graham number is sitting at a very healthy 19.93, which is below our threshold of 22.50. If you recall, when I analyzed the company based on F2015 financials the Graham number was 37.87, but at the time of my review it was sitting at 13.72 based on forward EPS at the time. So it has gone up relative to my last valuation, but is still cheap in my eyes. In fact, I doubled my position earlier this week when there was a dip to the low $10.00/share range.

Reviewing the annual report, the company came in under the consensus F2016 EPS: actual EPS was 1.12, vs. a mean forward estimate of 1.14. However, even at 1.12, this was a 16.10% increase over the previous year. Exco completed the acquisition earlier this year of AFX Industries LLC which added significantly to its revenue streams on a go forward basis, to the tune of 11.40% for their consolidated sales revenue for the year. This acquisition also saw the overall debt load of the firm go up: net debt went from $21million in F2015 to $110million in F2016, $100million of which was related to the acquisition. Overall however, I feel that this is a positive story for Exco since it has already added to their overall sales revenue.

Two other points to consider for Exco are the currency exchange rate, as well as the effects of president-elect Donald Trump. A weakening Canadian dollar has been very favourable for Exco:

Over the year, the US dollar averaged 7% higher ($1.32 versus $1.24) against the Canadian dollar contributing $15.2 million in sales to the current year. Similarly, the Euro averaged 5% higher ($1.46 versus $1.41) against the Canadian dollar contributing $5.7 million to sales.

Source: 2016 Annual Report

With regards to the president-elect, if he does go through with moving more jobs into the US and/or increasing duties (or completely eliminating NAFTA), I am not sure what this will do to Exco exports from Canada to the US: as the US is a key trading partner, there may be a material impact on the quantity and dollar value of goods shipping from Canada to the US. That said, Exco is making serious movements in other parts of the world:

  • AFX is a key supplier to BMW, giving them access to European markets
  • Operations in Thailand are giving them a launchpad to better penetrate the Asian market

Activities such as this lessen my worry about impacts of the president-elect at this point: even if there are material changes to NAFTA, with Exco’s Canadian customers, and access to other markets such as Europe and Asia, will mitigate any effects.

With the above in mind, I maintain my recommendation of buy for Exco Technologies Ltd.

Disclosure: Long XTC.TO as of December 9, 2016.

Exco Technologies Ltd. (XTC.TO) Analysis

Whilst looking for a new dividend grower, I came upon XTC.TO, a small-cap stock on the TSX:

Exco Technologies Limited, together with its subsidiaries, designs, develops, manufactures, and sells dies, moulds, components and assemblies, and consumable equipment for the die-cast, extrusion and automotive industries. It operates in two segments, Casting and Extrusion Technology, and Automotive Solutions. The Casting and Extrusion Technology segment designs and engineers tooling and other manufacturing equipment for automotive and other industrial markets. The Automotive Solutions segment produces automotive interior components and assemblies primarily for seating, cargo storage, and restraint for sale to automotive manufacturers and tier 1 suppliers. It operates in the United States, Europe, Mexico, Canada, South America, Asia, and other countries. Exco Technologies Limited was founded in 1952 and is based in Markham, Canada.

Source: Yahoo Finance

Based on my recommendation criteria, listed below, I would base XTC.TO as a hold, mainly driven by its current valuation at the end of F2015. However, based on current prices and forward EPS, I rate it as a buy, and I explain this below.

Criteria Value Threshold Pass?
Strong financial condition Current Ratio 2.27 1.50 YES
Earnings Stability Number of most recent years of positive EPS 5.00 3.00 YES
Earnings Stability Number of consecutive years of negative EPS 2.00 1.00 NO
Dividend Growth Compound Annual Dividend Growth 0.15 0.02 YES
Share Price Growth Compound Annual Share Price Growth 0.12 0.03 YES
EPS Growth Compound Annual EPS Growth 0.15 0.03 YES
Moderate P/E Ratio P/E 15.08 15.00 NO
Moderate P/BV Ratio P/BV 2.51 1.50
Moderate P/E × P/BV Ratio P/E × P/BV 37.87 22.50

The above criteria are based off of the F2005-F2015 annual reports:

Year EPS Dividend per Share Dividend Payout Ratio (EPS) Dividend Payout Ratio (FCFS) ROE P/E Ratio Book Value Price to Book Value (P/BV) Net Income (000s) P/E × P/BV
F2005 $0.2686 $0.0500 18.6170% 45.3986% 7.1927% 14.9308 $3.7340 1.0739 $11,132.00 16.0346
F2006 ($0.0148) $0.0500 (337.6013%) 20.0137% (0.4089%) (270.0811) $3.6222 1.1043 ($616.00) (298.2515)
F2007 $0.0739 $0.0600 81.2094% 44.4359% 2.0934% 67.6745 $3.5293 1.4167 $3,062.00 95.8751
F2008 ($0.3388) $0.0700 (20.6614%) 273.4050% (10.5751%) (5.3129) $3.2037 0.5618 ($13,934.00) (2.9851)
F2009 ($0.4341) $0.0700 (16.1245%) 38.6560% (15.3727%) (3.8699) $2.8240 0.5949 ($17,666.00) (2.3022)
F2010 $0.2465 $0.0800 32.4536% 29.6711% 8.4540% 13.9956 $2.9158 1.1832 $10,077.00 16.5594
F2011 $0.3617 $0.1050 29.0279% (257.3751%) 11.2945% 9.2336 $3.2026 1.0429 $14,807.00 9.6297
F2012 $0.6002 $0.1350 22.4921% 23.2983% 17.0085% 8.0638 $3.5289 1.3715 $24,449.00 11.0598
F2013 $0.5810 $0.1730 29.7772% 795.1354% 14.3980% 11.1363 $4.0352 1.6034 $23,632.00 17.8561
F2014 $0.7389 $0.1950 26.3920% 51.7543% 15.1204% 13.7374 $4.8865 2.0771 $30,656.00 28.5346
F2015 $0.9639 $0.2300 23.8611% 45.7759% 16.6417% 15.0844 $5.7921 2.5103 $40,759.00 37.8662

On a 10 year basis, I like this company. Both EPS and dividend have trended upwards since F2005, although EPS was hit rather hard during the financial crisis. As XTC.TO is a provider for various discretionary industries (e.g. automotive), this is not really a surprise. However, the management team managed to keep the dividend afloat, even when they were facing a loss of $0.43/share in F2009, and they were quickly able to grow it again the following year by 14.3% from $0.08/share to $0.09/share. Reviewing the 10 year growth, on a compounded basis (i.e. CAGR), dividend growth has been 14.9% and EPS growth has been 15.3%: EPS is growing faster than the dividend, which means there is plenty of room for continued increases. And this shows, in their dividend payout ratio (discussed below), which has generally been low (less than 30.0% since 2010, with a peak of 81.2% in 2007 during the entry into the financial crisis). Moreover, if we review the company since the financial crisis, EPS is on a clear upward trajectory: form a loss of $0.43/share in F2009 to a positive EPS of $0.96/share in F2015. The following following chart illustrates this:

XTC.TO Dividend, EPS, and Free Cash Flow per Share

XTC.TO Dividend, EPS, and Free Cash Flow per Share

One element of minor concern is the F2011 dip in free cash flow per share: for the period of F2011 it dropped into negative territory, which forced the dividend payout ratio per free cash flow share (FCFPS) to be in negative territory as well. What this means is that the XTC.TO paid cash out (via dividend), but also had net cash flows out of the firm as well, which is something I typically do not like to see. If a company is in a net-negative cash flow position, I question what the source for dividends is. However, reviewing the F2011 statements, XTC.TO comments that this overspending in capital expenditures (which ultimately reduces FCFPS) was due to their Allper acquisition, as well as some other miscellaneous spending. True to their word, FCFPS has been on a generally upward trend since then. There was another minor blip in F2013 where there was positive FCFPS, but the dividend payout ratio to FCFPS was greater than 100% (e.g. dividends/share > FCFPS), but again this was related to acquisitions and upgrades to existing facilities.

Reviewing the 10 year history of dividend payout ratios against EPS and FCFPS, there have been some extreme peaks and valleys:

Dividend payout ratios against earnings per share and free cash flow per share

Payout Ratios against EPS and FCFPS

However, if we exclude negative EPS and the FCFPS outliers, a healthier picture is presented:

XTC.TO Dividend Payout Ratios against EPS and FCFPS Excluding Outliers

XTC.TO Dividend Payout Ratios against EPS and FCFPS Excluding Outliers

Payout ratios in general against EPS are generally below 35%. More importantly, dividend payout ratios against FCFPS are generally at or below 50%. In other words: the increasing dividend is coming from an increasing free cash flow, leaving plenty of room for dividend increases in the future. While XTC.TO has not made an outright statement as to their dividend policy, if history is any indicator of the future, there should be healthy dividend increases to come.

With regards to valuation, P/E, P/BV, and P/E × P/BV have been generally healthy, illustrated below:

Price to Earnings, Price to Book Value, and Price to Book Value multiplied by Price to Earnings

P/E, P/BV, and P/BV × P/BV

In the early 2000s the company was generally over-valued, but since the financial crisis the P/E has remained consistently low at less than 15 (edging to 15.1 in F2015), and price to book value has also been somewhat decent, peaking at 2.5× in F2015. Based on the F2015 fiscal results, the company was overvalued with a P/E × P/BV exceeding our threshold of 22.50. However, that was based off of a F2015 closing share price of $14.54. The price is currently trending around $12.00, and if we review the forward EPS from analysis ($1.14 for F2016 based on 3 analysis, as listed by BMO InvestorLine’s equity research), and the historic P/BV ratio of 1.32, we get:

XTC.TO valuation as of Sep 16 2016
Current Price $11.83
Current Dividend $0.28
Mean Forward EPS $1.14
Dividend Yield 2.37%
P/E 10.38
Historic mean P/BV 1.32
P/E × P/BV 13.72

Based on a forward view, XTC.TO is undervalued.

Of course, there are some risks with this firm, the biggest one being the share price. If you are looking for a growth opportunity, where you will see plenty of consistent capital appreciation, this is not the stock for you; here is the 10 year price chart, with volumes, from Big Charts:

10 Year Weekly Close Price with Volumes

10 Year Weekly Close Price with Volumes

As you can see, there has generally been an upward trend, but it there are also some valleys to take into consideration. This means that if you need your capital back in a hurry, you may be selling during one of the downturns. Moreover, due to the low liquidity, bid-ask spreads may be very wide, which could have a negative effect on any selling activities.

As a final recommendation, I place this stock as a buy based on the current stock price, and the forward EPS. As a dividend income stream for my portfolio I feel it will do well over the long term, evidenced by its healthy 14.9% 10 year dividend CAGR, and consistently low dividend payout ratio—against both EPS and FCFPS—since the financial crisis. One final note is that the fiscal year end is September 30, 2016, so I will certainly be taking a closer look when the F2016 annual report comes out in a few months, to see how well the firm has performed this year.

Disclosure: Long XTC.TO as of Sep 16, 2016.