Ducommun's Troubled Skies

Aerospace parts manufacturer Ducommun (NYSE:DCO) has been experiencing some turbulence lately. Just when investors thought things were settling down, it released an earnings report that showed profits and margins slipping even as sales rose.

One of the risks involved in investing in Ducommun is its highly concentrated customer base. Boeing (NYSE:BA), Raytheon (NYSE:RTN), and Lockheed Martin (NYSE:LMT) account for more than 65% of its revenues across both its military and commercial segments. Of the three, Boeing garnered the lion's share, comprising more than 50% of sales.

In particular, Ducommun manufactures components and assemblies for Boeing's commercial aircraft, its C-17 troop transport airplane, and the Apache helicopter. Such dependence means that the loss of any of those contracts could have significant impact. Investors should take note, then, of Ducommun's warnings that Boeing awarded a spoiler assembly contract, worth about $5.8 million, or 9% of sales, to a competitor. Although the competitor isn't named in the warning, Goodrich (NYSE:GR) has crowed that it has won a contract from Boeing to supply the next generation of spoiler assemblies for the 737.

Fortunately, sales have been rising primarily due to increased military spending -- in particular, the Boeing Apache helicopter program that supplies rotor blades. Sales from the Apache contract account for around 19% of sales.

It doesn't look like Ducommun will be making great strides in its space sector, although through no fault of its own. It makes components for the expendable fuel tanks for NASA's troubled Space Shuttle program, accounting for about 4% of sales. But with NASA's spotty record of late, it doesn't appear Ducommun can expect any notable revenue growth here -- at least not any time soon.

It's been nearly a year and a half since Tom Gardner offered up Ducommun as a special recommendation to members of Motley Fool Hidden Gems, along with Encore Wire (NASDAQ:WIRE) and UsanaHealth Sciences (NASDAQ:USNA). During that period, Ducommun has surged by as much as 19% and fallen as far as 24% -- a nadir reached this past June.

After releasing its quarterly results, the stock now stands at virtually the same price at which it was recommended. Usana has fared remarkably better, up by about 77%, while Encore is down about 25% over that same time.

With profits down 5% as sales rose 8%, Ducommun might still have some more turbulence ahead. Investors might want to trim their holdings before getting caught in any wind shear.

Tom Gardner's picks in Motley Fool Hidden Gems are beating the market by 3 to 1. See all of Tom's recommendations with a 30-day risk-free trial.

Fool contributor Rich Duprey owns shares of Encore Wire but does not own any of the other stocks mentioned in this article. The Motley Fool has an ironclad disclosure policy.