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Beaten down but 'fundamentally strong' auto parts maker offers growing dividend

Investors looking for a cheap stock with a stable, growing dividend should consider global auto parts manufacturer Exco Technologies Ltd., analysts say.

Mark Blinch/REUTERS

Investors looking for a cheap stock with a stable, growing dividend should consider global auto parts manufacturer Exco Technologies Ltd., analysts say.

Shares of the Markham, Ont.-based company, which makes vehicle accessories and die-cast moulds, have gone in reverse over the past year – down more than 20 per cent because of some operational challenges, as well as concerns about slowing auto sales and potential trade disruptions imposed by U.S. President Donald Trump's administration.

Some analysts are expecting the shares to move higher in the months ahead, driven by a stronger balance sheet and potential growth through acquisitions.

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Exco chief executive officer Brian Robbins told The Globe recently that his company paused the acquisition of a company with Mexican operations amid concerns over Mr. Trump's promise to tear up the North American free-trade agreement. (Exco has operations around the world including the United States, Mexico and Canada, and about half of its sales are to the United States.)

Still, analysts and some investors say the company could find assets in other countries, and mergers and acquisition activity is only part of the reason to own the stock.

"We think it's a well-run company over the long term that rewards shareholders and is fundamentally strong," said Ryan Modesto, managing partner at independent research company 5i Research.

Mr. Modesto points to the company's recent dividend increase (the eighth hike in seven years), a recent share buyback, and the roughly 35-per-cent insider ownership of the company as signals of its confidence in future growth.

Among six analysts who cover the stock, four have a "buy" recommendation and two a "hold," with an average price target of $14.08. That's about a 17-per-cent premium to where the stock is currently trading, around $12.

The stock hit a 52-week high of $16.17 in mid-March last year, but fell back after some earnings misses and investor worries over "peak auto," which fuelled concerns that demand for its products would slow.

"Looking ahead, we expect to see multiple expansion in the shares as … investor concerns regarding 'peak' auto change in favour of a 'plateauing' auto production view," Scotiabank analyst Michael Doumet said in a Jan. 9 note, where he upgraded the stock to "sector outperform" (similar to buy) from "sector perform" (similar to hold) and increased his target to $15 from $13.50.

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Exco missed some earnings expectations in previous quarters, but investors are more optimistic after, on Feb. 1, it reported first-quarter sales of $153.1-million, up 17 per cent compared with a year earlier and above analysts' expectation of about $119-million.

Net income slipped 3 per cent to $11.5-million, or 27 cents a share, compared with $11.8-million, or 28 cents a share, a year ago. The company said profit was reduced by $1.2-million in costs associated with the permanent closing of its operations in Lesotho.

Exco also increased its quarterly dividend by 14 per cent to 8 cents a share starting in March. The stock currently yields about 2.8 per cent.

Industrial Alliance Securities analyst Neil Linsdell believes demand for some of Exco's products – which includes accessories such as leather seats and mesh nets, as well as moulds that help lower vehicle weight – will remain strong even if auto sales flatten.

"Those are some of the major things we like for the story and I think it's not fully appreciated or understood by a lot of investors," Mr. Linsdell said in an interview. He has a "buy" rating and $17 target on the stock, which is the highest among his peers who cover it.

GMP Securities analyst Ben Jekic has a "buy" rating and $16 target, citing the company's strong balance sheet and the potential for acquisitions to accelerate growth.

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"We believe management could be looking to deploy capital toward acquisitions soon, especially given the success of the recent AFX deal," Mr. Jekic said in a Feb. 2 note. Last year, Exco bought Michigan-based AFX Industries, a supplier of interior trim for auto makers.

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About the Author

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More


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