DUCOMMUN INC /DE/ (DCO) stock intrinsic value fair value estimate & owner earnings analysis

Ducommun supplies structural assemblies and electronic systems to aircraft and defense programs. About 58% of 2025 revenue came from military and space, 38% from commercial aerospace and 4% from industrial. The customer base is concentrated: the top ten customers were 60.7% of 2025 revenue, and RTX alone was 17.9% (others include Boeing, Lockheed Martin and Northrop Grumman). Backlog was $1,202.9 million at the end of 2025, up from $1,060.8 million a year earlier, with $844.0 million expected to be delivered within twelve months. How we measure earning power. We start with operating cash flow, take out swings in working capital, subtract stock compensation as a real cost, and deduct only the capital spending needed to stand still. We then add back interest paid to see what the business earns before its lenders, value that stream, and subtract net debt at the end. On that basis the business earned about $3.82 per share in 2022, $2.63 in 2023 and $3.33 in 2024. 2025 as reported was distorted by the settlement of the litigation over the June 2020 Guaymas fire: a $150.0 million payment (of which $56.0 million was funded by insurers), plus smaller subrogation claims, produced a $107.3 million net charge, and roughly $103 million of it was paid in cash during 2025. Adding that one-time cash cost back, 2025 was about $5.92 per share. The May 2026 amended annual report restated stock compensation upward (2024 rose from $17.8 million to $26.9 million, cutting 2024 net income from $31.5 million to $21.7 million); we use the restated figures. The $132.5 million gain on the 2021 sale-leaseback of the Gardena facility is non-cash and does not enter our cash measures. Amortization of acquired intangibles (about $16.8 million a year) is a non-cash charge that we add back, but because we credit no growth and let earning power fade over time, it is not treated as permanent. The earning-power level we use is the median of 2022 through 2025 (with 2025 normalized as above): $3.57 per share, or about $56 million a year on 15.58 million diluted shares. Earlier years are left out because they predate the 2022 refinancing and the 2023 BLR Aerospace acquisition and carried much lower stock compensation ($3 to $11 million a year versus about $27 to $28 million in 2024 and 2025); 2021 was also dominated by the sale-leaseback. Growth check: the most recent full year, 2025, grew from $3.33 to $5.92 per share on the normalized basis, while the base case assumes year-one growth of 0% from the $3.57 median, below that trailing rate. Recent results are strong. In the first half of 2026 revenue rose 10.2% to $433.5 million, operating income was $44.1 million (a 10.2% margin versus 5.8% in the first half of 2025), and operating cash flow was $44.8 million versus $23.2 million. We do not lift the level to this pace because it rests on a short run of results and because of the working-capital issue below. The main thing that could make the analysis wrong is working capital. Receivables, contract assets and inventories, net of payables, contract liabilities and accruals, grew from about $131 million at the end of 2018 to about $391 million at the end of 2025, while revenue grew from $629 million to $825 million. Cash absorbed by these lines was $42.0 million in 2024, $50.2 million in 2025 and $22.4 million in the first half of 2026. Over 2021 to 2025, each extra dollar of revenue came with roughly 78 cents of extra working capital. The filing attributes the 2025 increase in contract assets to higher revenues but does not explain why they grew faster than sales, and we could not resolve that from the filings. Our earning-power figures follow the standard treatment of removing working-capital swings, so this cost is not in them; we charge it in the bear case and decline to credit growth in the base case. Base case: about $3.57 per share a year for ten years, then fading steadily to zero over the following twenty as today's programs age out. We credit no growth: the $844.0 million of backlog due for delivery in the next twelve months is only about 2% above 2025 revenue, and the recent working-capital cost of growth leaves little net value. The business is worth about $39.32 per share (roughly $613 million). Net debt is $15.34 per share ($239 million: $277.5 million borrowed under the 2025 credit facilities, $1.3 million of finance leases, less $39.8 million of cash, with borrowings and cash as of July 4, 2026 and finance leases as of year-end 2025), leaving about $23.98 per share. Bear case: the level drops to the 2023 low of $2.63 per share, and working capital absorbs about $45 million in each of the next two years (in line with 2024 and 2025), which leaves business cash slightly negative at about -$0.25 per share against interest of roughly $0.75 to $0.95 per share; we assume this is carried on the revolver, which had $344.8 million undrawn at year-end 2025. After that, earning power holds for ten years and fades to zero over the following ten, reflecting the concentration in a few large customers. The business is worth about $19.48 per share (roughly $304 million), against net debt of $15.34, leaving only about $4.13 per share. Bank debt is floating at Term SOFR plus 1.25% to 2.125%, close to our discount rate, so no adjustment is made for its cost, and the 2025 facilities replaced facilities that would have matured in July 2027. Bull case: earning power stays at the normalized 2025 level of $5.92 per share and grows 3% a year for three years, supported by the 13% rise in backlog, then holds to year ten and fades over twenty years. The business is worth about $70.65 per share (roughly $1,101 million); after net debt of $15.34 the shares are worth about $55.31. What we left out: margin expansion beyond levels already reached, share gains, new programs and any growth beyond the backlog-supported three years, because none of these is contracted or a proven repeating process. What we credit: the level of earnings the business has already produced repeatedly, and, in the bull case only, growth covered by the record backlog. What changed since our August 2026 analysis (bear $5.07, base $30.70, bull $64.26): the earlier base case discounted at 11% and assumed 2% growth forever. We now use a flat 6% return requirement, credit growth only when it is secured, and fade earning power to zero rather than assume it grows indefinitely, which lowers the base case even though the level of earnings is similar. We also now use the restated stock-compensation figures and adjust 2025 for the one-time fire settlement.