Is It Too Late To Consider Buying Exco Technologies (TSE:XTC)?

In the volatile landscape of the North American auto components sector, Exco Technologies (TSE:XTC) stands out as a case study in value investing. With a trailing P/E ratio of 10.6x—well below the industry average of 17.1x and peer average of 16.5x—the stock appears undervalued at first glance. But is this discount a buying opportunity, or a warning sign of deeper challenges? To answer this, we must dissect Exco's valuation, management's strategic execution, and its ability to navigate a sector grappling with production slowdowns, trade uncertainties, and shifting consumer preferences.

Undervaluation Amid Sector Headwinds

Exco's valuation metrics suggest a compelling entry point. At 10.6x earnings, the stock trades at a 38% discount to its industry peers, a gap that widens when compared to competitors like Linamar (LNR) at 20.9x and Magna International (MGA) at 10.7x. This undervaluation is not arbitrary. The auto components sector is navigating a perfect storm: declining vehicle production in North America and Europe, U.S. tariff pressures, and rising labor costs. For Exco, these headwinds have translated into a 34% year-over-year EBITDA contraction in Q3 2025 and a 4% revenue decline. Yet, the market's skepticism may be overcorrecting.

Management's Strategic Resilience

Under CEO Darren Kirk, Exco has demonstrated a disciplined approach to navigating cyclical downturns. The company's focus on lean manufacturing, automation, and cost optimization has preserved margins despite sector-wide declines. For instance, the Casting and Extrusion segment, which faced a 33% EBITDA drop in Q3 2025, still managed a 4% increase in pretax profit year-over-year through operational efficiencies. Management's emphasis on innovation—such as adopting additive (3D-printed) tooling for giga-press applications—positions Exco to capitalize on the automotive industry's shift toward lightweight aluminum components.

Geographic expansion further underscores strategic foresight. Greenfield operations in Morocco and Mexico not only reduce logistics costs but also align with reshoring trends under the USMCA. These moves enhance Exco's competitiveness against non-compliant suppliers and provide a buffer against regional economic volatility.

Margin Resilience and Financial Strength

Exco's financials reveal a company well-equipped to weather near-term turbulence. A debt-to-equity ratio of 24% and an interest coverage ratio of 7.1x highlight its low leverage and robust cash flow generation. In Q3 2025, despite a 34% EBITDA decline, the company produced $20.1 million in free cash flow, supported by $25.2 million in operating cash flow. This liquidity, combined with $56.6 million in available credit, provides flexibility to fund strategic initiatives or return capital to shareholders.

Historically, Exco has navigated downturns with disciplined cost management. During the 2022 semiconductor shortage, EBITDA margins contracted from 14.4% to 11.8%, but the company offset pressures through pricing discipline and operational improvements. While current margins are lower, management's track record suggests a capacity to restore profitability as demand stabilizes.

Long-Term Positioning in a Cyclical Sector

The auto components industry is inherently cyclical, but Exco's long-term positioning aligns with secular trends. The shift toward electrification and hybrid vehicles is driving demand for aluminum-based tooling, a core competency for Exco. Its investments in additive manufacturing and greenfield projects are designed to capture this growth. Additionally, the company's focus on sustainability—such as reducing carbon footprints through localized production—resonates with evolving regulatory and consumer preferences.

Technical Signals and Market Sentiment

Technical indicators present a mixed picture. While the stock has crossed above its 200-day moving average of C$6.41, suggesting a potential bullish shift, short-term ratings lean bearish, with a "sell" for the 1-week timeframe and "strong sell" for the 1-month period. Low trading volume (34,145 shares) raises questions about conviction in the recent price action. However, a recent upgrade from Cormark to "moderate buy" hints at improving sentiment, albeit with limited market impact.

Is It Too Late to Buy?

For value investors, the answer hinges on risk tolerance and time horizon. Exco's undervaluation relative to peers, combined with its strong balance sheet and strategic initiatives, suggests a compelling opportunity for those willing to ride out near-term volatility. The company's long-term targets—$750 million in revenue and $1.50 in EPS by 2026—remain achievable, supported by its positioning in electrification and reshoring trends.

However, investors must acknowledge the risks: a prolonged industry downturn, rising labor costs, and macroeconomic headwinds could delay recovery. The mixed technical signals also warrant caution. A prudent approach would involve entering at current levels with a focus on long-term fundamentals, while monitoring macroeconomic catalysts such as U.S. tariff policies and EV adoption rates.

In conclusion, Exco Technologies is not too late to consider—but it requires patience. The stock's valuation discount, coupled with management's resilience and long-term strategic vision, offers a compelling case for value investors willing to bet on the auto components sector's eventual rebound.