We recently compiled a list of the 10 Undervalued Aerospace Stocks To Buy According to Analysts. In this article, we are going to take a look at where Ducommun Incorporated (NYSE:DCO) stands against the other undervalued aerospace stocks.
The International Aerospace and Defense industry
The aerospace and defense industry is a fast-growing industry, mainly because of the increased global travel after the pandemic and increased geopolitical tensions, which has led to increased government spending on defense. According to Research and Markets, the global aerospace and defense industry was valued at $884 billion in 2023. The industry is expected to grow at a compound annual growth rate of 5.8% to reach $1.23 trillion by 2028. Growth in the sector pertains to the rise in military modernization and increased defense spending. Whereas, increased spending on air travel is contributing to the growth in the commercial aerospace industry.
Geopolitics and Increased Spending on Defense
The world has been in a straight of turmoil, with geopolitical tensions leading to wars. While war and geo-political tensions are a dealbreaker for many industries, for the aerospace and defense companies the story is different. One of the key drivers of revenue for such companies is government contracts for military-grade aircraft, weapons, and defense systems. Thereby, with increased risks of war, defense spending goes up and aerospace and defense companies land more contracts.
According to a report by CNBC on April 22, global military spending hit an all-time high in 2023 after a 7% ramp-up. The global military spending was at a record high of $2.4 trillion last year. One of the key drivers of increased defense spending has been the prolonged Russia-Ukraine conflict and the recent tensions between Israel and Palestine. During the previous year the United States, China, and Russia were noted to be the biggest military spenders.
According to the U.S. Department of Defense, the government has $2.09 trillion in budgetary resources and plans to spend $972.88 Billion during 2024, out of which $229.80 billion is designated for award obligations. This indicates increased business opportunities for aerospace and defense companies during the year.
Upcoming Trends in the Aerospace Industry
According to a survey conducted by McKinsey & Company, AI-powered advancements can reshape aircraft maintenance, repair, and overhaul, however, companies need to accept the digital transformation.
Aircraft fleet management is a challenging sector. In the US alone, airline companies have witnessed a 15% increase in maintenance costs during the past 5 years. Moreover, there has been a 14% increase in flight delays due to maintenance.
The maintenance, repair, and overhaul (MRO) can be optimized using AI-powered solutions that allow better performance and improve efficiency. For Instance, AI-powered MRO can predict proper maintenance needs for an aircraft and the labor, material, and time needed for the maintenance. However, to leverage the power of AI, maintenance companies would have to become comfortable with adapting to new technologies and deal with the status quo disruption. The survey by McKinsey & Company found that only 33% of their respondents believed digital adoption to be critically important in achieving organizational objectives. Whereas 70% believed it could become critically important in the next 3 to 5 years, indicating hesitation towards immediate adoption of AI-powered solutions in the MRO sector.
Our Methodology
To compile the list of 10 undervalued aerospace stocks to buy according to analysts we used the Finviz stock screener and iShares U.S. Aerospace & Defense ETF. We aggregated a list of stocks that operated in the aerospace and defense industry and filtered stocks that had a forward P/E ratio of less than 22 and a positive earnings growth rate. These stocks are cheaper than the market, which currently has a forward P/E of 22 (according to data from WSJ).
Once we had our filtered list, we ranked these stocks based on the average price target upside as per Wall Street analysts. The stocks are ranked in ascending order of the average price target upside as of August 15, 2024.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A commercial jetliner, flying high against the backdrop of a dramatic sunrise.
Ducommun Incorporated (NYSE:DCO)
Average Price Target Upside as of August 15: 21.37%
Forward P/E as of August 15: 20
Ducommun Incorporated (NYSE:DCO) is an international manufacturing and engineering services company that develops innovative electronics and structural solutions with applications in aerospace, defense, and industrial markets. The company operates through two main segments, namely Electronics Systems and Structural Systems. It sells its products to commercial customers including aircraft manufacturers and government agencies such as NASA.
The competitive advantage of Ducommun Incorporated (NYSE:DCO) stems from its years of experience in the business. The company stands as one of the oldest companies in California with over 175 years of experience in the aerospace and defense market. Looking at the past 5 years, Ducommun Incorporated (NYSE:DCO) has been able to grow its revenue by 2.77% and net income by 2.61%, indicating robust foundations.
During the most recent quarter, the Q2 of 2024, Ducommun Incorporated outperformed analyst expectations and posted robust growth. The revenue of the company grew 5.2% year-over-year to reach $197 million beating analyst expectations by 1.1%. Non-GAAP earnings per share were $0.83, ahead of market consensus by 36.6%. Revenue growth was backed by strong performance in the Commercial Aerospace and Military segments. The quarter also marked the fourth consecutive quarter with revenue exceeding $190 million indicating a robust and sustained demand for its products.
In addition to revenue growth, the company was also able to grow its backlog to $1.07 billion, a 5.7% increase year-over-year. Indicating successful upcoming quarters. The margins of Ducommun Incorporated (NYSE:DCO) also increased with EBITDA margins at 15.2%, up from 13.9% last year and gross margins at 26%, increasing 4.3% year-over-year.
DCO has experienced a slowdown in MAX build rates, however, it is well-positioned to take advantage as soon as the build rates ramp back up. Management believes if Boeing reaches a production rate of 38 MAX aircraft by the end of 2024, as per their recent communications, it will provide a major boost to DCO’s performance
DCO is cheap at current levels, it is trading at 20 times its forward earnings while the sector average sits at 22%. Moreover, its earnings are expected to grow by 34% during the year to reach $0.94. 4 analysts have a strong buy rating on the stock, with their median price target of $76 presenting an upside of 21.37% from current levels.
Cove Street Small Cap Value Fund stated the following regarding Ducommun Incorporated (NYSE:DCO) in its first quarter 2024 investor letter:
“We sold our position in Ducommun Incorporated (NYSE:DCO) this quarter. We like the aerospace and defense world and think the company has a solid conceptual runway to participate in niche programs on both sides of the industry. But we have concluded we just cannot stomach the management team, which refuses to recognize quaint ideas like “value creation PER SHARE,” the generation of free cashflow vs. a focus on revenue growth, and the idea that shareholders are partners that deserve transparent financials with which to judge performance and progress.”
Overall DCO ranks 3rd on our list of the best undervalued aerospace stocks to buy. While we acknowledge the potential of DCO as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DCO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
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