Ceradyne Gives a One-Two Punch

Wednesday was a grand day to be a Ceradyne (Nasdaq: CRDN  ) shareholder (said the Ceradyne shareholder). You see, even big defense contractors like Boeing (NYSE: BA  ) or Lockheed (NYSE: LMT  ) call it a "good day" when they book one high-profile contract win. Yesterday, little Ceradyne landed two.

First, the headliner: Against all odds, Ceradyne's "BULL" offering has horned its way into the military's "mine resistant, ambush protected" vehicle program. In Q3, as you may recall, Ceradyne placed a sizeable wager that by increasing R&D spending to build a pair of BULLs for testing by the Army, Ceradyne and its partner, Oshkosh (NYSE: OSK  ) , might win a place at the table when the military shifts gears into "MRAP II." It might also steal a march on current MRAP I players such as General Dynamics (NYSE: GD  ) , Force Protection (Nasdaq: FRPT  ) , BAE Systems, and Navistar (OTC BB: NAVZ.PK).

A bet worth making
Ceradyne incurred higher operating costs for its trouble, causing the company to "miss estimates" in Q3, and its stock suffered a sell-off. Now, though, the investment appears to be paying off. After receiving its two crash-test-dummy BULLs back from Aberdeen Proving Ground, and opining in a recent conference call that they appeared to have taken all the "explosively formed penetrators" the Army could throw at them and emerged intact, Ceradyne got its reward yesterday.

To wit, the government ordered another half-dozen BULLs for further evaluation in Q1 2008, at a total cost of $18.1 million. Granted, $18 million is just about 2.5% of what Ceradyne sells in a year. But this program could get real big, real quick. According to the firm's press release, this order is just the leading edge of "a $12.5 billion indefinite delivery/indefinite quantity (ID/IQ) contract."

Also granted, no matter how much of this IDIQ contract eventually goes toward buying BULLs, as opposed to competing MRAP II entries, Ceradyne will have to share the government largesse with its partners -- Oshkosh, which builds the BULL's chassis, and Ideal Innovation, Inc. (I-3), a private company that -- um, honestly, I'm not sure what they do, other than provide "innovative solutions for government and private industry to meet their most pressing technological, scientific, managerial and security requirements." (Presumably, this means I-3 figured out the best way to get Ceradyne's "integrated design crew compartment" affixed to Oshkosh's chassis.)

Roll 'em again
As I mentioned in the Oshkosh article linked above, Ceradyne took a big gamble when it hooked up with Oshkosh on this project, given that Oshkosh had just received a pink slip from the Marines for producing an "Alpha" armored vehicle that caused the Marines "concern regarding overall vehicle survivability." In contrast to that bet, Ceradyne's other contract win yesterday looked like a lock.

Smaller than the MRAP II award both initially and potentially, Ceradyne won a second IDIQ award on Wednesday, this time to produce "Enhanced Small Arms Protective Insert" (ESAPI) body armor plates for the Defense Supply Center Philadelphia. Valued at $16.2 million initially, with a potential value between $22 million and $87 million, this three-year-long contract plays to what has become the bread and butter of the business -- producing ceramic body armor for the troops. It also further cements Ceradyne's position in the body armor business, increasing the likelihood that when the two megacontracts Ceradyne mentioned on its November conference call are awarded, Ceradyne will get at least its fair share of the business.

To recap, these include:

  • Up to $400 million in expected ESAPI body armor orders from the U.S. Special Operations Command (SOCOM), and
  • A monster, five-year, $1.5 billion contract to produce "XSAPI" body armor -- the next generation after ESAPI. Ceradyne told us to expect word on the winner of this contract by Apr. 1, 2008.

Foolish takeaway
Wednesday was a grand day to be a Ceradyne investor, but even better days may lie ahead. The moonshot bet on MRAP II money just got a little bit less uncertain. Meanwhile, the more certain revenue from body armor is just around the corner. With a trailing P/E of 9, and analysts predicting 9% annual profits growth over the next half decade, Ceradyne looks -- if not bulletproof, then at least safer than a naked short.

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