Stock Analysis

Do Ducommun's (NYSE:DCO) Earnings Warrant Your Attention?

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NYSE:DCO
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It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. And in their study titled Who Falls Prey to the Wolf of Wall Street?' Leuz et. al. found that it is 'quite common' for investors to lose money by buying into 'pump and dump' schemes.

So if you're like me, you might be more interested in profitable, growing companies, like Ducommun (NYSE:DCO). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.

View our latest analysis for Ducommun

How Fast Is Ducommun Growing?

If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS). It's no surprise, then, that I like to invest in companies with EPS growth. It certainly is nice to see that Ducommun has managed to grow EPS by 27% per year over three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.

Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. While Ducommun may have maintained EBIT margins over the last year, revenue has fallen. Suffice it to say that is not a great sign of growth.

You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.

earnings-and-revenue-history
NYSE:DCO Earnings and Revenue History December 7th 2020

You don't drive with your eyes on the rear-view mirror, so you might be more interested in this free report showing analyst forecasts for Ducommun's future profits.

Are Ducommun Insiders Aligned With All Shareholders?

Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

Although we did see some insider selling (worth -US$319k) this was overshadowed by a mountain of buying, totalling US$1.8m in just one year. This makes me even more interested in Ducommun because it suggests that those who understand the company best, are optimistic. It is also worth noting that it was Chairman Stephen Oswald who made the biggest single purchase, worth US$509k, paying US$33.93 per share.

The good news, alongside the insider buying, for Ducommun bulls is that insiders (collectively) have a meaningful investment in the stock. To be specific, they have US$49m worth of shares. That shows significant buy-in, and may indicate conviction in the business strategy. Those holdings account for over 7.8% of the company; visible skin in the game.

Should You Add Ducommun To Your Watchlist?

Given my belief that share price follows earnings per share you can easily imagine how I feel about Ducommun's strong EPS growth. Not only that, but we can see that insiders both own a lot of, and are buying more, shares in the company. So I do think this is one stock worth watching. What about risks? Every company has them, and we've spotted 3 warning signs for Ducommun (of which 1 is a bit concerning!) you should know about.

As a growth investor I do like to see insider buying. But Ducommun isn't the only one. You can see a a free list of them here.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

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What are the risks and opportunities for Ducommun?

Ducommun Incorporated provides engineering and manufacturing products and services primarily to the aerospace and defense, industrial, medical, and other industries in the United States.

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Rewards

  • Trading at 25.6% below our estimate of its fair value

  • Earnings are forecast to grow 2.88% per year

  • Earnings grew by 283.3% over the past year

Risks

  • Debt is not well covered by operating cash flow

  • High level of non-cash earnings

  • Significant insider selling over the past 3 months

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