Summary
Business:
Defense/aerospace parts manufacturing
Headquarters:
Long Beach
CEO:
Joe Berenato
Market Cap:
$133.5 million Dividend Yield: N/A*
Total Liabilities:
$50.8 million P/E Ratio: 10.6
Long-Term Debt:
$19.6 million
* Ducommun Inc. does not pay dividends.
Through a series of shrewd acquisitions, including the purchase of a $60 million (annual revenues) company that’s expected to close this month, Ducommun Inc. has further solidified its standing as Los Angeles County’s second largest defense/aerospace subcontractor.
While most defense subcontractors are struggling to stay afloat in the shrinking market brought on by the Pentagon’s make-it-better-for-less orientation, which trickles down from the prime contractors, analysts are projecting Ducommun’s stock to rise as much as 20 percent in the coming year.
Shares of the Long Beach company, which were trading at $11.75 apiece a year ago, have been fluctuating between $12 to $15 a share in recent months, closing at $13.85 on June 6.
Wall Street, however, is only cautiously optimistic about the immediate future of the company, which analysts said has been plagued by production inefficiencies.
Ducommun manufactures structural and electro-mechanical components for aircraft, radar racks and other electronic enclosures, and airplane seats.
Commercial airline parts account for 55 percent of the company’s revenues, while military and space vehicles make up the other 35 percent and 10 percent, respectively. With sales of commercial jets expected to level off over the next two years, there is concern about a company whose biggest client by far is Boeing Co.
With only $19.6 million in long-term debt, however, Ducommun was able to secure a $50 million loan to help it purchase Monrovia-based Composite Structures Inc., L.A. County’s third largest defense/aerospace subcontractor. Composite Structures’ metal bonding and composite materials operations complement Ducommun’s parts manufacturing divisions.
Among the products manufactured by Composite Structures are the blades used for the Army’s Apache helicopters, for which Boeing is the prime contractor.
“I’ve been waiting for the company to utilize its strong balance sheet for acquisitions for a couple of years now,” said Steve Wortman, an analyst with New York City-based Sidoti & Co. “They’ve finally done so. It bolsters their capabilities and allows them to move up in the supplier food chain.”
Since Joe Berenato took over as Ducommun’s chief executive in 1997, the company has invested $105 million in the purchase of seven companies, including Composite Structures.
“This is a significant acquisition for us,” said Berenato. “It’s more than a third of our existing (revenue) size. We’re in the process of achieving critical mass so we can provide a broad range of capabilities and finance our own growth. (Prime contractors) need larger and more capable subcontractors. They need to deal with fewer guys who can do more for them because they can no longer afford to manage 20,000 suppliers, many of which are $10 million in (annual) sales or less. It’s too expensive.”
He would not reveal whether the $50 million loan, from a consortium of banks led by Bank of America, constituted the entire purchase price.
Composite Structures’ solid revenue base should provide a shot in the fiscal arm for Ducommun, which reported net income of $3 million (31 cents per diluted share) for the first quarter ended March 31, up from $2.9 million (30 cents per share) for the same quarter last year.
First-quarter revenues were $48.5 million, vs. $39.9 million in the first quarter of 2000.
The 152-year-old company, which proudly touts itself as California’s oldest, began when its founder, Charles Ducommun, a Swiss watchmaker, walked from Fort Smith, Ark. to L.A., where he sold picks and shovels to gold miners.
In more modern times, the company had metals and electronics distribution operations before entering the defense/aerospace industry in the late 1970s.
Ducommun went through hard times from 1985 through 1988, losing an average of $20 million annually.
Enter Norman Barkeley, who had been CEO of Lear Seigler Inc., then a Santa Monica aerospace and automotive conglomerate. Upon assuming the helm of Ducommun, Barkeley cut costs, changed the management team and implemented a sorely needed long-range plan that carried the company through the next decade before Berenato took over.
“We’re in an industry where the subcontractor base will shrink in terms of the number of participants, but the survivors will be larger and more capable,” said Berenato. “Our goal is to be one of those. We’re not going to get big just to get bigger. We need to grow in both profits and sales. Would we like to be a billion-dollar company 10 years from now? Sure. But we haven’t cast that in stone anyplace.”
