Ducommun's Defense Business Strengthens Amidst Commercial Aerospace Challenges

Ducommun's commercial aerospace business is facing destocking due to Boeing and Spirit AeroSystems, but their defense business remains strong, leading to consecutive quarters of profitability. The company's diversified product portfolio and ability to navigate market challenges are key strengths, but the commercial aerospace weakness remains a concern.

Ducommun (NYSE:DCO) continues to navigate challenges in its commercial aerospace business, as destocking from Boeing (BA) and Spirit AeroSystems (SPR) persists. However, the company's defense segment remains robust, driving consecutive quarters of profitability. This resilience is attributed to strong demand for missile and radar systems, which have shown significant growth.

In the second quarter of 2025, Ducommun reported a 3% year-over-year increase in net revenue, reaching $202 million, marking the 17th consecutive quarter of year-over-year growth. The defense segment contributed significantly to this growth, with a 39% year-over-year increase, driven by a 16% growth in the missile franchise and a 46% growth in the radar franchise. This growth is partially offset by a 10% decline in the commercial aerospace segment, due to ongoing headwinds from BA and SPR destocking [1].

The company's gross margin matched the record of 26.6% set in the first quarter of 2025, up by 60 basis points year-over-year, while adjusted EBITDA increased by 8% year-over-year to $32.4 million. The backlog ended at $1.02 billion, down $50 million year-over-year due to the timing of awards. The defense backlog remained flat at $593 million, with missile backlog growing 30% year-over-year [1].

Ducommun's defense segment is expected to continue growing, supported by high demand for missile and radar systems. The company is involved in 18 missile programs and has seen significant growth in its radar business, including programs such as the SPY-6 radar and the LTAMDS radar, which is part of the Patriot missile defense system. Global military spending increased by 9.4% in 2024 to $2.7 trillion, indicating sustained funding for the types of platforms Ducommun supplies [1].

While the commercial aerospace segment faces challenges, management anticipates that the inventory overhang from BA and SPR will continue through late 2025 and potentially into early 2026. However, the company expects several high-value defense programs to resume production in the second half of 2025, which could spur growth through 2026 [1].

Ducommun is largely insulated from tariff exposure, as 96% of its revenue is produced in the U.S., with the rest from a small Mexico facility exempt under the USMCA agreement. The company's revenue exposure to China is minimal, and management has outlined strategies to mitigate the impact of tariffs [1].

In terms of relative valuation, Ducommun's forward revenue growth rate of 5.66% underperforms its peers' median of 9.58% by 0.59x. However, its EBITDA margin TTM of 12.70% is 1.04x of the peers' median of 12.26%, and its net income margin TTM outpaces the peers' median of 2.57% by 1.96x. The market revenue estimate for 2025 is $826 million, with an EPS of $3.73, and for 2026, it is $892 million, with an EPS of $4.51. Using a 5-year historical average P/E of 23.43x, the implied share price for 2026 is $105.67, which sits close to the consensus price target [1].

Ducommun's commercial aerospace weakness remains a concern, but its diversified product portfolio and ability to navigate market challenges are key strengths. The company's strong defense franchise and resilience in the face of ongoing commercial aerospace headwinds make it a compelling investment for those looking for a balanced exposure to both defense and commercial aerospace sectors.

References:
[1] https://seekingalpha.com/article/4814471-ducommun-stock-q2-defense-strength-offsets-commercial-weakness-reiterate-buy
[2] https://finance.yahoo.com/news/5-must-read-analyst-questions-054250369.html