Ducommun BUY Target $ 34

DCO : NYSE : US$26.87
BUY 
Target: US$34.00

COMPANY DESCRIPTION:
Ducommun, headquartered in Carson, California, is a supplier of aerostructures and components for commercial and military aircraft and engines, as well as a supplier of electronic assemblies and systems for commercial, military, industrial, medical and natural resources markets.

IMPROVING MARGINS AND DELEVERAGING TO DRIVE UPSIDE
Investment recommendation
We are initiating coverage of Ducommun (DCO) with a BUY rating and a $34 price target. As execution continues to improve, confidence in cash flows and debt reduction should increase, serving as positive catalysts. We believe H2/13 represents the bottom for non-A&D sales, which should provide additional upside into 2014.
Investment highlights
 While structures represent only 42% of sales, sentiment on segment margin improvement is important for DCO stock. We believe strong improvement in 2013 (100bps over 2012) and then steady improvement into 2014-2015 will be positive, demonstrating execution capabilities and success with new programs. Improved execution is also reducing the negative overhang from the 2011 LaBarge acquisition.
 DCO on track to reduce debt by ~$30M each year through 2015, which would contribute ~$0.10 to EPS. We believe the non-A&D sales will trough in H2/13, adding to the 2014 upside.
Valuation
Our $34 price target is based on the average of a 15.0x EPS multiple and an 8.0x EBITDA multiple, applied to our 2014 estimates. We believe even with the strong 2013 YTD performance (up >70%), investor interest will remain positive as execution improves.

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