Focus On Missile Programs And Electronic Warfare Will Strengthen Market Position

Key Takeaways

• Vision 2027 strategy prioritizes revenue from engineered products and aftermarket content, aiming to boost future revenue growth.
  
• Focus on high-growth defense sectors, supported by backlog and orders, strengthens revenue prospects, especially in defense.
  
• Economic and geopolitical developments, competition, and supply chain disruptions pose risks to revenue, margins, and earnings, alongside dependency on U.S. defense spending and regulatory challenges.

Catalysts

Provides engineering and manufacturing services for products and applications used in the aerospace and defense, industrial, medical, and other industries in the United States.

• Ducommun's Vision 2027 strategy, which focuses on increasing the revenue percentage from engineered products and aftermarket content, is expected to drive future revenue growth, as evidenced by the increase from 19% in 2023 to 23% in 2024.
  
• The company anticipates cost savings and improved margins from facility consolidations, with restructuring expected to generate $11 million to $13 million in annual savings, enhancing net margins as receiving plants ramp up production.
  
• Strategic pricing initiatives and productivity improvements have contributed to gross margin expansion, which increased by 180 basis points in Q4 2024 year-over-year, positively impacting earnings.
  
• Ducommun's focus on high-growth defense sectors, such as missile programs and electronic warfare, supported by significant backlog and new international orders, positions it well for revenue growth, particularly in defense.
  
• The proactive hedging strategy on interest rates, pegging a significant portion of the debt at a favorable SOFR rate, is expected to reduce interest expenses, thus enhancing net income and EPS in the coming years.

Ducommun Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ducommun's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 8.4% in 3 years time.
• Analysts expect earnings to reach $79.3 million (and earnings per share of $5.36) by about May 2028, up from $31.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.2x on those 2028 earnings, down from 27.1x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 31.7x.
• Analysts expect the number of shares outstanding to grow by 0.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.71%, as per the Simply Wall St company report.

Ducommun Future Earnings Per Share Growth

Risks

• Economic and geopolitical developments, including potential impacts from international trade restrictions and rising interest rates, could negatively affect revenue by increasing costs or reducing market access.
  
• Competition and execution challenges, particularly in growing the engineered products segment and expanding into new markets, could pressure net margins due to increased investment costs or failure to achieve expected efficiencies.
  
• Dependence on U.S. government defense spending and potential shifts in budget priorities pose a risk to earnings if defense programs they supply are cut back or canceled.
  
• Supply chain issues and labor disruptions could lead to delays or increased costs, impacting both revenue and net margins if they cannot fulfill customer orders efficiently.
  
• Legal and regulatory risks, including compliance costs and potential liabilities, could negatively impact earnings through increased administrative expenses or legal settlements.

Valuation

• The analysts have a consensus price target of $79.2 for Ducommun based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $91.0, and the most bearish reporting a price target of just $70.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $941.1 million, earnings will come to $79.3 million, and it would be trading on a PE ratio of 18.2x, assuming you use a discount rate of 6.7%.
• Given the current share price of $57.49, the analyst price target of $79.2 is 27.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.