Last month, Ducommun (NYSE:DCO) was awarded a $38 million contract from the Space and Airborne Systems division of Raytheon (NYSE:RTN) to manufacture and integrate subcomponents into Raytheon's AESA radar system for military aircraft. This award comes on the heels of a $15 million contract from Boeing (NYSE:BA) to produce fuselage panels for its commercial aircraft. The Boeing contract extends into 2007, while the Raytheon contract lasts through 2008. The fact that both contracts are follow-ons seems to indicate that Ducommun is meeting client expectations.

Clearly, Ducommun has been spinning its propellers. But will it take off?

It's not likely. While the announcement of these contracts isn't bad news for shareholders, it isn't the type of news that will make Ducommun a winning investment. On the back of a very tiny envelope, I estimate that, with the company's current net profit margin of around 5%, these contracts combined will contribute only $0.26 per share to earnings through 2008. Don't be surprised if even less of this contract revenue contributes to Ducommun's earnings, since the company's profit margins are decaying at an average rate of 11% per year. You read correctly: Ducommun's profit margin currently has a half-life of about five years.

Why, you ask, does Ducommun sport such sagging margins?

Sadly, the answer is hinted at in the magnitude of the contracts themselves. Combined, Raytheon and Boeing accounted for 56% of Ducommun's revenues in its latest second quarter. Fellow Fool Rich Duprey noted this worrisome concentration two months ago, and things don't appear to have gotten any better. With a customer base so concentrated, Ducommun can't afford to lose business from either. As a result, Ducommun relies on low-bid contracts that provide shareholders with razor-thin profit margins. In addition to piling up contracts from its current customers, Ducommun management should be focused on expanding its minuscule customer base.

Ducommun sure doesn't look like the next home run stock, but it has taught me a very valuable investing lesson: Companies with a concentrated (i.e., weak) customer base can exhibit margin decay.

Ducommun is a special, if untracked, recommendation of the Motley Fool Hidden Gems newsletter.

Fool contributor and propeller-head Jason Mac Gurn owns shares of Ducommun. The Motley Fool has a disclosure policy.