Ducommun (DCO)

Aerospace and defense company Ducommun (NYSE:DCO) reported Q1 CY2025 results beating Wall Street’s revenue expectations, with sales up 1.7% year on year to $194.1 million. Its non-GAAP profit of $0.83 per share was 18.1% above analysts’ consensus estimates.

Company Overview

California’s oldest company, Ducommun (NYSE:DCO) is a provider of engineering and manufacturing services for high-performance products primarily within the aerospace and defense industries.

Aerospace companies often possess technical expertise and have made significant capital investments to produce complex products. It is an industry where innovation is important, and lately, emissions and automation are in focus, so companies that boast advances in these areas can take market share. On the other hand, demand for aerospace products can ebb and flow with economic cycles and geopolitical tensions, which can be particularly painful for companies with high fixed costs.

Ducommun’s peers and competitors include Virgin Galactic (NSYE:SPCE) and Park Aerospace (NYSE:PKE)

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Ducommun’s sales grew at a sluggish 1.8% compounded annual growth rate over the last five years. This was below our standards and is a rough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Ducommun’s annualized revenue growth of 4% over the last two years is above its five-year trend, but we were still disappointed by the results.

We can better understand the company’s revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Ducommun’s backlog reached $1.05 billion in the latest quarter and averaged 4.8% year-on-year growth over the last two years. Because this number is in line with its revenue growth, we can see the company effectively balanced its new order intake and fulfillment processes.

This quarter, Ducommun reported modest year-on-year revenue growth of 1.7% but beat Wall Street’s estimates by 0.7%.

Looking ahead, sell-side analysts expect revenue to grow 5.5% over the next 12 months, similar to its two-year rate. Although this projection implies its newer products and services will spur better top-line performance, it is still below the sector average.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Ducommun was profitable over the last five years but held back by its large cost base. Its average operating margin of 6.2% was weak for an industrials business.

Looking at the trend in its profitability, Ducommun’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, Ducommun generated an operating profit margin of 8.5%, up 1.9 percentage points year on year. This increase was a welcome development and shows it was more efficient.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Ducommun’s EPS grew at a weak 3.8% compounded annual growth rate over the last five years. This performance was better than its flat revenue, but we take it with a grain of salt because its operating margin didn’t expand and it didn’t repurchase its shares, meaning the delta came from reduced interest expenses or taxes.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Ducommun, its two-year annual EPS growth of 3.1% is similar to its five-year trend, implying stable earnings.

In Q1, Ducommun reported EPS at $0.83, up from $0.70 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Ducommun’s full-year EPS of $3.40 to grow 12.5%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Ducommun has shown poor cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.3%, lousy for an industrials business.

Taking a step back, we can see that Ducommun failed to improve its margin during that time. Its unexciting margin and trend likely have shareholders hoping for a change.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Ducommun historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.5%, lower than the typical cost of capital (how much it costs to raise money) for industrials companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Ducommun’s ROIC has stayed the same over the last few years. If the company wants to become an investable business, it must improve its returns by generating more profitable growth.

Ducommun reported $61.46 million of cash and $270.2 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $120.1 million of EBITDA over the last 12 months, we view Ducommun’s 1.7× net-debt-to-EBITDA ratio as safe. We also see its $8.16 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Ducommun blew past analysts’ EBITDA expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. Zooming out, we think this quarter featured some important positives. The stock remained flat at $58.61 immediately following the results.

Updated: May 21, 2025 at 11:32 PM EDT

Are you wondering whether to buy Ducommun or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Ducommun falls short of our quality standards. To begin with, its revenue growth was weak over the last five years. And while its rising cash profitability gives it more optionality, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its low free cash flow margins give it little breathing room.

Ducommun’s P/E ratio based on the next 12 months is 17.8x. This multiple tells us a lot of good news is priced in - you can find better investment opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $81.40 on the company (compared to the current share price of $68.15).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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