Investor Essentials Daily

This company will be one of the big winners of increased defense spending

Ducommun (DCO)
March 27, 2024

Global conflicts and military tensions have intensified in recent years, leading to a significant increase in deaths and conflict events.

The 2023 Global Peace Index and ACLED’s 2024 Conflict Index highlight a sharp rise in violence, prompting countries to boost their defense budgets and military expenditures.

The U.S. and Russia, among others, have proposed substantial increases in their defense spending, with global military expenditure reaching over $2.2 trillion in 2023.

This surge in defense budgets presents a significant opportunity for defense industry suppliers like Ducommun (DCO), which specializes in electronic and structural systems for military and commercial aircraft.

Despite the company’s strong order backlog and potential for growth driven by higher defense spending, its stock is currently perceived pessimistically by the market.

Investor Essentials Daily:
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The number and intensity of conflicts worldwide have been increasing in recent years.

The 2023 Global Peace Index report showed that deaths from global conflict increased by 96% between 2021 and 2022.

Conflict event rates have also been rising significantly according to data from ACLED, with their 2024 Conflict Index update noting that “the world is getting far more violent in recent years.”

This escalation of global conflicts has led many countries to ramp up their defense budgets and military spending to protect themselves.

The U.S. requested $850 billion for defense spending in fiscal year 2024, which represents a 4% increase over the previous year’s budget. The proposed 2024 US defense budget is one of the largest amounts ever. This aligns with NATO’s calls for members to spend at least 2% of GDP on defense.

Other countries are also increasing their defense budgets substantially.

Russia plans to increase its defense by 29% compared to the previous year, reaching $140 billion. The Stockholm International Peace Research Institute (SIPRI) indicated in its report that in 2024, Russia’s military spending will rise to 7.1% of its gross domestic product (GDP), making up 35% of the government’s total spending.

Meanwhile, recent data from SIPRI shows that worldwide military expenditure reached a new all-time high of over $2.2 trillion in 2023, with European spending surging particularly due to the war in Ukraine.

As global conflicts rise and countries increase defense budgets to protect themselves, this represents a major business opportunity for companies supplying the defense industry.

Ducommun (DCO), which provides electronic and structural systems for military and commercial aircraft, is well-positioned to benefit from this trend.

The company designs and manufactures complex electronics and cable assemblies for aerospace and defense platforms. Some of its specialties include avionics systems, data management systems, and wiring harness assemblies.

Additionally, Ducommun fabricates large aircraft structures as well as engine structural components. It supplies products such as engine nacelles, struts, and pylons to aircraft OEMs and MRO service providers.

With increased defense budgets and demand for advanced electronics on modern military aircraft, Ducommun’s business is poised to grow.

However, Ducommun is not priced accurately for its growth potential… At the current stock price, the market expects Ducommun’s Uniform return on assets (‘‘ROA’’) to shrink to around 7% from 10% in 2023.

Overall, Ducommun has a strong order backlog of around $1 billion as of today, reflecting rising demand from both commercial and military customers.

Its solid balance sheet also allows the company to invest in new capabilities and capacity expansion.

With its differentiated offerings across electronics and structural systems for aerospace and defense platforms, Ducommun appears well-suited to capitalize on higher defense spending globally in the coming years.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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