EOT Trade Alert – July 29, 2010

Corey Williams | July 29, 2010

July 29, 2010

Trade Alert:

Buy DCO September 18 2010 $20.00 Puts at $1.50 or better

Company Background:

Ducommun (DCO) designs and supplies components for commercial and military aircraft.

Short-Term Catalyst:

The aerospace and defense industry is a brutal business. The manufacturing of new aircraft is dominated by a few major players like Boeing (BA) and privately owned Airbus.

The major players compete for commercial and military contracts. Then they contract out the design and manufacturing of specific components to companies like Ducommun.

Ducommun provides new and replacement parts for a variety of commercial and military aircraft. Last quarter their sales were split 40% commercial, 58% military, and 2% space.

And their four biggest customers provide nearly half of sales.

Here’s the problem… Sales are slipping.

Ducommun generates a lot of income from supplying parts for the Apache helicopter and regional and business aircraft. Right now the military isn’t buying as many Apache helicopters. And companies just aren’t buying new aircraft in this soft economy.

And we’ve already heard Boeing say their defense business is suffering from federal budget cuts. This isn’t a good sign for DCO who generates 58% of their sales from the military.

Last quarter, DCO was able to offset lower sales by cutting costs. But cost cutting alone can’t drive earnings growth. They need to grow revenue too. And right now sales are going in the wrong direction.

If they post another quarter of declining sales, we’ll see investors hit the sell button.

The company also has a history of coming up short of analysts’ earnings estimates. In fact, they missed in three out of the last four quarters.

Despite the companies shortcomings, DCO has rocketed higher by 24% over the last few weeks. And it did it on no real news. I think we’ll see DCO head straight back down after they report earnings next week.

Let’s grab puts on DCO now before they report earnings.

Trade Details:

Underlying Stock Symbol:	DCO
Current Bid-Ask Price:	$1.05 – $1.35
Option “Buy Up To” Price:	$1.50
Break-Even On Stock At Expiration:	$18.50
Maximum Risk Per Contract:	$150

Exit Strategy:

DCO is trading at $20.17 per share. Resistance levels will be at $22.50 and again at $24.25. Remember, we want this stock to move lower. Support levels will be at $18 and $16. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.

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