Ceradyne Seared

Wow. Now that was unpleasant.

Belying a wave of good news on the revived prospects for its body armor business, ceramics specialist Ceradyne (Nasdaq: CRDN  ) stunned the market with a third-quarter report that underperformed expectations in just about every manner imaginable.

  • Sales of $167.7 million dropped 12% in comparison to last year's Q3, and fell 8% shy of analyst estimates.
  • Profits took a 37% tumble, landing with a whomp at $0.73 per share, fully one-third less than expected.

Even Ceradyne's caveat that profits would have looked better but for a pair of one-time charges failed to provide comfort. Adding back the $0.31 per share that those charges subtracted would only get Ceradyne back up to a buck, four -- still short of estimates. And while Ceradyne didn't highlight the fact, by repurchasing some of its shares over the past year, it actually boosted its profits per share -- meaning things would have looked even uglier without the buybacks.

Bad news, worse news
What else could have gone wrong? Well, let's see. New bookings only amounted to $119.4 million -- far less than needed to replace those few sales that Ceradyne did make in Q3. This suggests further slowing of sales going forward -- the exact opposite of what one would expect from a shop that just signed a $2.4 billion armor supply deal with the military. And backlog is basically flat year over year, which again suggests little growth in sight.

And even the good news is bad
Furthermore, as CEO Joel Moskowitz pointed out, the Army ordered Ceradyne to stop work on some of its deliveries, probably in response to a BAE Systems protest of awards issued to Ceradyne. Moskowitz further warned that he does not expect the new XSAPI/ESAPI contract to reach its $2.4 billion ceiling because he believes the Army will primarily be ordering only XSAPI armor, and not the ESAPI component of the contract.

And the good news?
The good news I had hoped to see as recently as yesterday -- that Ceradyne is part of one of the multiple teams bidding on the Army's JLTV program -- has yet to arrive as scheduled. Everyone from General Dynamics (NYSE: GD  ) to Force Protection (Nasdaq: FRPT  ) to Lockheed Martin (NYSE: LMT  ) to Boeing (NYSE: BA  ) is bidding to build this next-gen Humvee. But the Army still hasn't announced the winners, and even when they do, there's no guarantee Ceradyne will be among them.

So where's that leave us?
Depressed, but also intrigued. As bad as the news was, I have a sneaking suspicion that Mr. Market overreacted to it. Learn more about Ceradyne in:

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


Read/Post Comments (5) | Recommend This Article (5)

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  • Report this Comment On October 28, 2008, at 4:55 PM, DarthWader wrote:

    The good news is that gross margins held firm, nondefense revenue was up 50%, the balance sheet is still super strong/super liquid, and the business has generated $91.5M in free cash year to date. Roll that number out over 12 months and divide Ceradynes $475M market cap by it and you have a ratio below 3.5. Simply put, businesses that trade for 3.5 times fcf are broken and leveraged. This one is not.

  • Report this Comment On October 28, 2008, at 6:11 PM, CM001 wrote:

    Market cap minus cash values the entire defense business at 0 value. Remember the debt is convertible.

  • Report this Comment On October 29, 2008, at 1:59 AM, CM001 wrote:

    Here is an important answer from the CFO:

    And to give you an idea on the stock buyback, we have to take that up, obviously, with our board. But here’s a thought, that if we actually queued on ’09, we’ll have $315 million in the bank; and if we pay off the convertible debt, that’ll leave us $200 million. That will be $7.5 of pure cash on all of our stock in $17. It seems like that for – it’s a pretty compelling story.

    Solar is expected to be $80M and expected to grow at 35 to 40%. What value you will assign for this business?

  • Report this Comment On October 29, 2008, at 2:07 AM, dividendgrowth wrote:

    It should be obvious to anyone that Mr Market is currently in a manic depressive mode bordering on the insanity.

  • Report this Comment On October 30, 2008, at 10:36 AM, frptwins wrote:

    i think this CEO is full of crap with his margins on products and stock buyback plan...Remember the BULL?

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