Undervalued Exco Technologies, FCF/EV Yield 11%, Shareholder Yield 3%

One of the cheapest stocks in our Canada All TSX Stock Screener is Exco Technologies Limited (TSE:XTC).

Exco Technologies Limited (Exco) is a designer, developer and manufacturer of dies, molds, components and assemblies, and consumable equipment for the die-cast, extrusion and automotive industries. The company’s segments include casting and extrusion, and automotive solutions.

A quick look at the company’s share price over the past twelve months (below) shows that the price is down 12% but here’s why Exco is currently undervalued.

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I always start my valuation with the company’s balance sheet. A quick look at Exco’s latest balance sheet, dated March 2017, shows that the company has $28 Million (CAD) in cash and cash equivalents. If we take a look at Exco’s debt obligations we can see that the company has short-term debt of $4 Million (CAD), long-term debt of $39 Million (CAD), and capital leases of $11 Million (CAD), or total debt of $54 Million (CAD). If we subtract the total cash and cash equivalents from its total debt that equates to a net debt position of $26 Million (CAD).

Exco currently has a market cap of $455 Million (CAD) so if we add the net debt of $26 Million (CAD) that means that the company is currently trading on an Enterprise Value of $481 Million (CAD). Now, if we take a look at the company’s income statements we can see that Exco had $71 Million (CAD) in trailing twelve month operating earnings. That means that the company is currently trading on an Acquirer’s Multiple of 6.76, or 6.76 times operating earnings (ttm). That places Exco squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

While some investors might be concerned that Exco has a net debt position of $26 Million (CAD) it’s important to note the company’s latest cash flow statements. Exco’s latest cash flow statements show that the company has generated trailing twelve month operating cash flow of $70 Million (CAD). Moreover, trailing twelve month capex currently sits at just $15 Million (CAD) which equates to $55 Million (CAD) in free cash flow (ttm), or a FCF/EV Yield of 11%. It’s also important to note that Exco pays a nice dividend yield of 3%, with a payout ratio of 24.5%.

Exco is a great company that has consistently grown its revenues from 2007. Its latest trailing twelve month revenues are $632 Million (CAD) which is an historical high for the company. Exco has also consistently grown its net profits every year since 2009 and its trailing twelve month revenues of $51 Million (CAD) are also at historical highs. The company has paid a dividend every year since 2007 and has consistently grown its book value per share from $3.65 (CAD) in 2007 to $7.07 (CAD) today. The reason the company’s been able to do this is its ability to consistently generate significant free cash flow from its operations while maintaining low debt levels.

In terms of the company’s current valuation. Exco is trading on a P/E of 8.9, a P/B of 1.5, a P/S of 0.7, a free cash flow yield of 11% and an Acquirer’s Multiple of 6.76, or 6.76 times operating revenue (ttm). Plus the company pays a nice dividend yield of 3%. That’s why Exco is currently undervalued.

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Over a full eighteen-and-one-half year period from January 2, 1999 to June 16, 2017, the Canada All TSX stock screener generated a total return of 2,536 percent, or a compound growth rate (CAGR) of 19.1 percent per year. This compared favorably with the S&P/TSX Composite TR, which returned a cumulative total of 232 percent, or 4.7 percent compound.

Article by Johnny Hopkins - The Acquirer's Multiple

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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”