Ducommun trades at $63.69 and has moved in lockstep with the market. Its shares have returned 10.8% over the last six months while the S&P 500 has gained 10.4%.
Is there a buying opportunity in Ducommun, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.We're sitting this one out for now. Here are three reasons why you should be careful with DCO and a stock we'd rather own.
Why Do We Think Ducommun Will Underperform?
California’s oldest company, Ducommun (NYSE:DCO) is a provider of engineering and manufacturing services for high-performance products primarily within the aerospace and defense industries.
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 $1.04 billion in the latest quarter, and over the last two years, its year-on-year growth averaged 4.9%. This performance was underwhelming and suggests that increasing competition is causing challenges in winning new orders. 
2. EPS Barely Growing
We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Ducommun’s full-year EPS grew at a weak 1.9% compounded annual growth rate over the last three years, worse than the broader industrials sector.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared 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 5%, somewhat low compared to the best industrials companies that consistently pump out 20%+.
Final Judgment
Ducommun doesn’t pass our quality test. That said, the stock currently trades at 17.8× forward price-to-earnings (or $63.69 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better stocks to buy right now. We’d recommend looking at MercadoLibre, the Amazon and PayPal of Latin America.
Stocks We Would Buy Instead of Ducommun
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