Since March 2021, the S&P 500 has delivered a total return of 65%. But one standout stock has nearly doubled the market - over the past five years, Ducommun has surged 125% to $126.79 per share. Its momentum hasn’t stopped as it’s also gained 35.7% in the last six months thanks to its solid quarterly results, beating the S&P by 37%.
Is there a buying opportunity in Ducommun, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Ducommun Will Underperform?
We’re glad investors have benefited from the price increase, but we're cautious about Ducommun. Here are three reasons there are better opportunities than DCO and a stock we'd rather own.
1. Backlog Declines as Orders Drop
In addition to reported revenue, backlog is a useful data point for analyzing Aerospace companies. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Ducommun’s future revenue streams.
Ducommun’s backlog came in at $1.20 billion in the latest quarter, and it averaged 16% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation. 
2. Shrinking Operating Margin
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Analyzing the trend in its profitability, Ducommun’s operating margin decreased by 11.5 percentage points 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. Ducommun’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 3.9%.
3. Breakeven Free Cash Flow Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Ducommun broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Ducommun, we’ll be cheering from the sidelines. With its shares beating the market recently, the stock trades at 28.8× forward P/E (or $126.79 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at our favorite semiconductor picks and shovels play.
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