Ducommun, Inc. (DCO), founded in California in 1849, is a provider of engineering and manufacturing services for high-cost-of-failure applications in the aerospace, defense, industrial, oil and gas, mining, and medical industries.
The company operates through three business units; Ducommun AeroStructures, a manufacturing services company supplying a wide variety of composite and metal bond structures and assemblies, including aircraft wing spoilers, large fuselage skins, helicopter blades, flight control surfaces and engine components, to a global customer base; Ducommun LaBarge Technologies, a provider of electronics manufacturing services, including the design and manufacture of complex cable assemblies and interconnect systems, printed circuit board assemblies, and higher-level electronic, electromechanical and mechanical assemblies for diverse, high-reliability applications; and Ducommun Miltec, an engineering services company engaged in missile and aerospace system design, development, integration, and testing.
Financial information presented herein, is based on the company's most recent SEC Form 10-K filing for year ending December 31, 2011, as filed with the Securities and Exchange Commission on March 05, 2012.
Short-Term Investment Valuation
The stock closed recently at $11.77, with First Resistance at $13.52, a 15% increase from the recent close, and Second Resistance at $15.33, a 30% increase from the recent close. Should the stock price breakout above second resistance, the next resistance level is $25.71, a 118% increase from the recent close.
The stock should find Support at $10.84, an 8% decline from the recent close. Our Equilibrium number, the mid point between Resistance and Support is $14.43, a 23% increase from the recent close, which makes the odds of a successful short-term trade about 4 to 1.
Earnings Growth Valuation
Earnings growth valuations are based on the spread between year over year earnings growth and the current PE.
In the case of Ducommun, Inc., the company had a year over year earnings growth of (16%), ending FY11 with earnings of $2.65 per share.
With a trailing twelve month PE currently at 4, the spread between earnings growth and the PE is (3), meaning that for an investor focusing on earnings growth, the stock should be trading at $2.69, a $9.08 decrease from a recent close.
Fundamental Investment Valuation
Liquidity: The company ended FY11 with a Current Ratio of 2.9, a Quick Ratio of 1.2, a Cash Ratio of 0.4, and a Cash Conversion Cycle of 138 days. The company ended the year with a Book Value of $19.27, but when Goodwill and Intangibles which comprise 44% of Total Assets are factored in, the company's Tangible Book Value becomes ($13.91).
Profitability: FY11 found the company with a Gross Margin of 22%, an Operating Margin of 4%, a Net Operation Margin After Taxes (NOPAT) of 5%, a Return On Invested Capital (ROIC) of 9%, and an Effective Tax rate of 9%.
Debt: The company ended FY11 with Total Debt of $392.3 million, a year over year increase of 11839%. Additionally, the company paid an average annual Interest Rate 4.64%, a year over year decrease of 91%, had a Debt to Cash Ratio of 9.5, and a Debt to Equity Ratio of 1.9.
Cash Flow: The company's FY11 Operating Cash Flow was $6.40 per share, a year over year increase of 39%. The company also ended FY11 with Free Cash Flow of $4.95 per share, a year over year increase of 36%.
Dividends: During FY11 the company paid an $0.08 per share dividend, a 74% year over year decline.
Fundamental Valuation: Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $31-$33 range.
I spent some time trying to understand why Ducommun has been hammered the way the markets have hammered it. The company ended fiscal 2011 with a backlog of $636.4 million compared to a fiscal year 2010 backlog of $328 million.
Granted the increase was primarily because the company acquired LaBarge, Inc., a company that primarily provides electronics manufacturing services to the aerospace and defense industries. Certainly when a company the size of Ducommun, Inc. makes a $325 million all cash acquisition, the acquiring company's financial statements are going to suffer and such are the fortunes of DCO.
But what happens in the coming years as the acquisition starts to add to earnings, as the company's current debt is reduced, as all of these new assets continue to perform? Will the markets recognize these positive changes? Will the value of the stock increase? In my opinion that is exactly what will happen.
So coupling a current value estimate for the stock of $31-$33 against a recent close of $11.77, I think it maybe time to add to the Wax Ink position.
Considering a Recent Close of $11.77, an estimated Merger and Acquisition payback of 11 years (assuming EBITDA remains the same), and year over year earnings growth of (16%), we believe on a fundamental investment basis, the stock is currently underpriced, and a candidate for additional research for the Wax Ink Portfolio.
Disclosure: I am long DCO. We currently have a position in Ducommun, Inc., and plan to add to that position as we deem appropriate. We have received no compensation to write about a specific stock, sector, or theme.