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Ducommun Incorporated - a Financial Analysis

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DUCOMMUN INCORPORATED - A FINANCIAL ANALYSIS
Ana Miramontes
Keller Graduate School of Management
Securities Analysis
FIN560
Professor Kasthuri Henry
June 15, 2013

DUCOMMUN INCORPORATED - A FINANCIAL ANALYSIS
Charles Ducommun settled in California during the Gold Rush, he never would have imagined the impact this move would make his future and the future of investors in the stock market. According to Ducommun Incorporated’s website, Ducommun began operations in 1849 as small hardware store in Los Angeles, California. The company has since then evolved into a $600 million dollar company (Ducommun Incorporated, n.d.). In the early years of the aerospace industry, Ducommun Incorporated provided aircraft aluminum to aircraft makers. The company has completely evolved – there is no semblance of what used to be a hardware store. Today the firm is a premier provider of engineering and manufacturing services in the areas of defense, aerospace, mining, the petroleum industry and the medical field. Ducommun Incorporated has three major divisions: Ducommun Aero Structures (DAS), Ducommun LaBarge Technologies (DLT) and Ducommun Miltec. Together, these three units generated over $747 million in revenue for fiscal year ended 2012 and returned an EPS of $1.55 to their shareholders.
As part of the aerospace and defense industry and the electronic manufacturing services, Ducommun is still in a mature life cycle. However, due to the ever-changing technological world we live in, the leadership team has strategically positioned the firm into a growth life cycle through expansion and acquisition. Economic uncertainty and slowing global growth for some aerospace and defense products products has lead the industry executives to seek consolidation, expansion into new geographies, and new product development outside the aerospace and defense industry (Aerospace & Defense 2012 Industry Outlook Survey, 2012, p. 7). Ducommun Incorporated recently completed its own acquisition. In June of 2011 it acquired LaBarge, Inc. LaBarge’s acquisition strategically positioned Ducommun as a strong player in the global electronic manufacturing services market. As a niche player, Ducommun will retain the ability to compete effectively and differentiate itself through high-mix, low volume business and industry expertise serving the medical device, natural resource and other non-aerospace and defense markets. Due to the growing and expanding nature of this new business model and due to many uncertainties with the federal budget, Ducommun Incorporated elected to stop paying dividends in January of 2011 (Ducommun Incorporated, n.d.). The cash retained by the company has given it the ability to make acquisitions and to offer financial protection during these uncertain and difficult financial times.
During fiscal year 2011 Ducommun reported a net loss of $47.5 million. This was attributable in part to a goodwill impairment charge of $54 million. The acquisition of LaBarge and the company’s strategic focus on efficient operations lead to a return to profitability and a positive return on equity. Although the return on equity for Ducommun has rebounded at 7.7% it is still significantly lower than its peers. Ducommun’s sampled peers have been able to generate an ROE ranging from 13% to almost 21%. The industry average ROE for the Aerospace/Defense industry with a sampling of 66 firms, including the sampled population, is significantly higher than Ducommun and its sampled peers at 24.03% as reported by Damodaran Online from New York University (Damodaran Online website, 2013).
While ROE is turned around for Ducommun we can see the negative effect of the interest burden, tax efficiency and the pre-interest pretax margin 2011 when the company underwent a major change to their capital structure. Ducommun has managed to pay down their long-term debt in the amount of $26.5 million in 2012 and plans to pay another $30 million in 2013 which will continue the trend of a rising ROE and a de-levering of the firm (insert citation from Ducommun Annual Report, page 13). The continued focus on deleveraging the company and increasing operating margins should strengthen the firm’s value and position amongst its peers.
Ducommun’s financial performance has taken quite a turn since the acquisition of LaBarge. Year-end revenues were up 28.6% year over year. This is due to increased sales related to the LaBarge acquisition. The LaBarge acquisition greatly enhanced, the firm’s product offerings. Gross profit margin increased .7% to 18.9% over 2011. Also, in an expectation and a readiness for deep federal budget cuts, Ducommun decreased their operating expenses by 38.1% year over year and is prepared to remain conservative in order to remain profitable. The company reported a net income of $16.4 million versus a net loss in the prior year of $47.6 million. YEAR | EPS | 2012 | 1.55 | 2011 | -4.52 | 2010 | 1.89 | 2009 | 0.97 | 2008 | 1.24 |

Ducommun’s EPS has been quite volatile over the last few years. Ducommun ended the year with an EPS of $1.55 and analysts’ expectations give the stock an estimated EPS $1.86 for fiscal year end 2013 (Zacks website, 2013). Over the last five years, the stock has had an annualized rate of return of 4.56% with an expected annual growth rate from 2012 to estimated 2013 of 20% (Zacks website, 2013). This clearly reflects the return of the addition of shareholder value which is clearly due to the strategic acquisition of LaBarge.

References
Aerospace & defense 2012 industry outlook survey: Anticipating consolidation. targeting M&A. (2012). Retrieved from KPMG website: http://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/Documents/2012-aerospace-defense-outlook-survey.pdf
Damodaran Online website. (2013). http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/roe.html
Ducommun Incorporated. (n.d.). http://www.ducommun.com/dco/overview.aspx
Zacks website. (2013). http://www.zacks.com/stock/quote/dco/detailed-estimates…...

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