Rising geopolitical tensions have led nations to significantly boost defense spending, reaching $2.46 trillion in 2024 with increased allocations from the US, Russia, and Europe. 

This surge in spending is driving demand for modern military equipment and advanced aerospace systems. 

Ducommun (DCO), which supplies critical electronic and structural components for both military and commercial aircraft, is poised to benefit, though market valuations may not fully reflect their growth potential.

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This rise in geopolitical tensions has prompted nations to reassess their defense strategies and spending. 

As a result, countries across the globe are boosting their budgets to protect national interests and improve military readiness.

In 2024, global defense spending rose to $2.46 trillion from $2.24 trillion in 2023. The growth rate increased to 7.4%, compared to 6.5% in 2023 and 3.5% in 2022. 

Consequently, defense spending reached 1.9% of global GDP in 2024, up from 1.6% in 2022 and 1.8% in 2023.

The United States has increased its fiscal year 2025 defense request to $880 billion, a 4% jump from the previous year.

Similarly, Russia raised its defense spending by 29% compared to its previous budget, reaching an estimated $150 billion in 2024.

According to the Stockholm International Peace Research Institute (SIPRI), this increase will bring Russia’s military expenditure to roughly 7% of its GDP, with defense costs comprising 35% of its total government spending.

In response, European defense spending grew 11.7% last year. The conflict in Ukraine boosted NATO members’ commitment to spend 2% of GDP on defense. 

This persistent escalation in conflict and military spending also opens up significant business opportunities for defense suppliers.

As countries seek modern equipment and faster production capabilities, the industry is under pressure to deliver efficient, cost-effective solutions.

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 builds complex electronics and cable assemblies that are critical to both military and commercial aircraft.

Its products include avionics systems, data management solutions, and wiring harness assemblies which are essential elements for modern aircraft systems.

Beyond its work in electronics, Ducommun also manufactures large aircraft structures and engine components.

The company supplies engine nacelles, struts, and pylons to major aircraft manufacturers and maintenance, repair, and overhaul (MRO) service providers.

Ducommun’s ability to offer both electronic and structural solutions provides an advantage in the aerospace market.

Modern military aircraft require advanced electronic systems to handle communications, navigation, and defense functions.

At the same time, commercial aircraft demand reliable structural components that meet strict safety and performance standards.

Recent trends in defense spending and the modernization of military aircraft are expected to drive further growth for Ducommun.

With global defense budgets increasing, military aircraft are now calling for more advanced electronic systems.

At the same time, commercial aerospace programs, particularly those related to Airbus platforms like the A220 and A320, are gaining momentum and started to recover.

The company is also active in improving its manufacturing methods. By embracing modern production techniques and automation, Ducommun aims to meet increasing demand while keeping production efficient.

All these factors combined enabled the company to sustain high profitability in recent years with Uniform return on assets ‘’ROA’’ not falling below 10%.

Wall Street analysts expect ROA to improve in the coming years with the company having strong tailwinds behind it. 

However, Ducommun is not priced accurately for its growth potential with the market having concerns about defense spending and recovery in commercial aircraft production.

We can also see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market predicts that the company’s ROA will fall to around 7% instead of improving.

Ducommun’s strength lies in its ability to deliver vital, high-performance systems that modern aircraft depend on.

Whether through its electronic assemblies or its reliable structural components, the company plays a key role in keeping aircraft safe and effective.

As global defense spending rises and air travel demand continues to climb, the company’s dual expertise will be in demand.

The current market pricing does not fully reflect the opportunities ahead, positioning Ducommun as an attractive option for investors looking at the aerospace and defense sector.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research