Ducommun's Strategic Position in Defense-Driven Growth and Margin Expansion: A High-Conviction Play for Long-Term Capital Appreciation

The U.S. defense sector is undergoing a seismic shift, driven by geopolitical tensions, modernization demands, and a global rearming cycle. For investors seeking long-term capital appreciation, Ducommun Incorporated (DCOM) stands out as a compelling industrial manufacturing play. By aligning its operational strengths with the surging U.S. defense budget and leveraging margin-expansion initiatives, Ducommun is positioned to capitalize on structural tailwinds in a sector projected to grow for years.

Defense Spending as a Tailwind: A $1.05 Billion Backlog and Counting

The U.S. Department of Defense's (DoD) fiscal 2025 budget request of $849.8 billion reflects a strategic pivot toward readiness and technological dominance. Ducommun, a critical supplier to defense primes and the DoD, is directly benefiting from this surge. As of Q2 2025, the company reported a $1.05 billion defense backlog, with 80% of it slated for delivery in 2025 and 2026. This backlog is anchored by high-visibility programs such as the Next Generation Jammer, AMRAAM missile systems, and classified initiatives, all of which align with DoD priorities like missile replenishment and hypersonic technology development.

Ducommun's 95% U.S.-based manufacturing model insulates it from global supply chain risks, a critical advantage as the Biden administration prioritizes reshoring. The company's focus on hypersonics, solid rocket motors, and unmanned systems positions it at the forefront of next-generation defense innovation. With global defense spending hitting $2.7 trillion in 2024, Ducommun's niche in high-margin, mission-critical components ensures it remains a key beneficiary of this multi-trillion-dollar ecosystem.

Operational Efficiency: The Engine Behind Margin Expansion

Ducommun's financial performance in Q2 2025 underscores its operational discipline. The company achieved a 26.6% gross margin, up 60 basis points year-over-year, and 16.0% adjusted EBITDA margin, a 80-basis-point improvement. These gains stem from cost-reduction initiatives, including the completion of the Monrovia facility wind-down, which eliminated $10 million in annual restructuring charges. Additionally, Ducommun has secured duty exemptions for military products and cost pass-through clauses in customer contracts, mitigating tariff risks and preserving margins.

The company's Electronic Systems segment, which accounts for 54% of revenue, is a standout performer. In Q2 2025, it delivered 26.6% gross margins and 19.0% operating margins, driven by robust demand for missile and radar systems. This contrasts sharply with the Structural Systems segment, which faces headwinds from reduced Boeing-related volumes but is offset by defense-driven growth in rotary-wing aircraft platforms. Ducommun's VISION 2027 roadmap—targeting 18% adjusted EBITDA margins—is well within reach, with current performance already demonstrating 16% margins.

Competitive Advantages: Niche Expertise and Strategic Partnerships

While Ducommun competes with firms like Hermes Aviation and Tyvak Nano-Satellite Systems, its focus on high-margin defense platforms sets it apart. The company supports over a dozen key missile systems, including SM-3, SM-6, and Tomahawk, and is expanding its footprint in radar programs like SPY-6 and GATOR. These capabilities align with U.S. and NATO priorities, ensuring sustained demand.

Ducommun's partnerships with defense primes like Northrop Grumman further reinforce its competitive edge. These relationships provide access to large-scale contracts and reduce customer concentration risks. Unlike peers reliant on commercial aerospace, Ducommun's defense-centric model offers stability, with 80% of its backlog tied to government programs.

Investment Thesis: A High-Conviction Play for the Long Term

For investors, Ducommun represents a rare combination of defensive growth and margin resilience. Its $1.05 billion backlog, U.S.-centric supply chain, and VISION 2027 roadmap create a durable moat in a sector poised for multi-year expansion. The company's ability to pass through costs, coupled with its focus on high-margin defense platforms, ensures it can navigate macroeconomic headwinds while delivering consistent returns.

Key risks include potential delays in defense contract execution and geopolitical shifts that could alter spending priorities. However, the scale of Ducommun's backlog and its alignment with DoD modernization goals mitigate these concerns. With 17 consecutive quarters of year-over-year revenue growth and a clear path to 18% EBITDA margins by 2027, Ducommun is a high-conviction industrial play for investors seeking exposure to the U.S. defense renaissance.

Conclusion: Positioning for the Future of Defense

Ducommun's strategic positioning in the defense industrial base, combined with its operational efficiency and margin-expansion initiatives, makes it a standout in a sector defined by long-term growth. As the U.S. and global defense budgets continue to rise, Ducommun's focus on hypersonics, unmanned systems, and advanced radar technology ensures it remains at the cutting edge of national security innovation. For investors with a 5–10 year horizon, Ducommun offers a compelling opportunity to participate in the next phase of the defense boom.

Investment Recommendation: Buy and hold for long-term capital appreciation, with a focus on margin expansion and backlog conversion. Monitor contract awards and defense budget updates for near-term catalysts.