Ducommun has been on fire lately. In the past six months alone, the company’s stock price has rocketed 60.1%, reaching $96 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Ducommun, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Ducommun Not Exciting?
Despite the momentum, we're cautious about Ducommun. Here are three reasons why DCO doesn't excite us and a stock we'd rather own.
1. Weak Backlog Growth Points to Soft Demand
In addition to reported revenue, backlog is a useful data point for analyzing Aerospace companies. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Ducommun’s future revenue streams.
Ducommun’s backlog came in at $1.02 billion in the latest quarter, and over the last two years, its year-on-year growth averaged 3.8%. This performance was underwhelming and suggests that increasing competition is causing challenges in winning new orders. 
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Ducommun has shown poor cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.4%, lousy for an industrials business.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Ducommun historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.5%, lower than the typical cost of capital (how much it costs to raise money) for industrials companies.
Final Judgment
Ducommun’s business quality ultimately falls short of our standards. Following the recent rally, the stock trades at 23.6× forward P/E (or $96 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at one of our top software and edge computing picks.
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