Foolish Forecast: Is Ceradyne Charmed?

So far, so good. Ceradyne (Nasdaq: CRDN  ) "beat the Street" with its first two quarterly earnings reports this year. But the third time’s the charm, as the saying goes. Will tomorrow morning's news bring bad luck for shareholders?

What analysts say:

  • Buy, sell, or waffle? Eleven analysts give Ceradyne six buy ratings and five holds.
  • Revenue. On average, they're looking for sales to slip 5% to $182.7 million ...
  • Earnings. ... while profits shed a nickel to end at $1.11 per share.

What management says:
To paraphrase the American bard: "The report of Ceradyne's death is an exaggeration." Why, even Ceradyne's defense division, target of the most criticism from Wall Street analysts, has in recent weeks given indisputable proof that it remains among the living. Early this month, Ceradyne announced its receipt of an IDIQ award of around $2.4 billion to produce XSAPI body armor for the U.S. military. Three days later, Ceradyne confirmed it is manufacturing the first $73 million tranche for delivery.

What management does:
And not a moment too soon. In recent months, Ceradyne has depended heavily on its civilian operations to provide the bulk of good news. Meanwhile, high-margin military business has contracted -- taking Ceradyne's margins down with it. True, operating margins remain far above those of rival Kyocera (NYSE: KYO  ) , and they even slightly eclipse profitability at Corning (NYSE: GLW  ) -- but there's no denying the trend has been downward.

Margins

3/07

6/07

9/07

12/07

3/08

6/08

Gross

39.7%

40.3%

40.7%

40.4%

39.7%

39.5%

Operating

29.6%

30.4%

30%

29.2%

28%

27.3%

Net

19.8%

20.5%

19.7%

19.1%

18.4%

17.7%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Likewise, Ceradyne's stock has trended downward. The strangest thing, though, is that October's news on the XSAPI award hasn't been able to turn that latter trend around. Not that I'm complaining. As a Ceradyne shareholder myself, I relish the opportunity to buy more shares of a company whose fortunes may soon turn upward, at discount prices.

What could cause that opportunity to dry up? Guidance that clarifies how quickly $2.4 billion in future revenue will turn into actual profits, for one. News (expected this afternoon) on whether Ceradyne is part of any of the three teams expected to receive awards under the military's new JLTV program, for another. Everyone from General Dynamics (NYSE: GD  ) to Lockheed Martin (NYSE: LMT  ) to Boeing (NYSE: BA  ) is bidding to build this next-gen Humvee. Unless it gets postponed (again), that's three more chances to turn Ceradyne's fortunes around.

Learn more about Ceradyne in:

Fool contributor Rich Smith owns shares of Boeing and Ceradyne. The Motley Fool has a disclosure policy.


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