Ceradyne Gets a Tat

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Does anyone really understand how Mr. Market's mind works?

Consider this: When ceramics specialist Ceradyne (Nasdaq: CRDN) reported last week that it had won a $10 million order to supply ceramic body armor inserts to UNICOR, Ceradyne's stock price jumped 6% on the news. (UNICOR is the trade name for Federal Prison Industries Inc. Being owned by the government, it doesn't have a stock price.)

Now jump forward to yesterday's news that Ceradyne had won another contract from a "longtime trusted" (but unidentified) customer of Ceradyne subsidiary ESK Ceramics. The two contracts had three significant differences:

• First, Ceradyne's ESK subsidiary sells not high-tech body armor, but silicon carbide industrial pump seal faces. (Sexy!)
• Second, the ESK contract was worth not $10 million, but $50 million to Ceradyne.
• Third, and most pertinent to today's article, was the effect on Ceradyne's stock price. The five-times-larger ESK contract boosted Ceradyne's stock price less than one-third as far as the smaller, but sexier, body armor contract did.

This is ironic, because, according to Ceradyne, the ESK contract: "will support Ceradyne's strategy of developing commercial and industrial advanced technical ceramic products which are not dependent on its military product offering." In other words, Ceradyne intended that its press release reassure investors that the company isn't all about government military contracts, where it competes with everyone from Mine Safety (NYSE: MSA) on body armor, to General Dynamics (NYSE: GD), Textron (NYSE: TXT), and Force Protection (Nasdaq: FRPT) on armored vehicles. Ceradyne was reminding us that it has a civilian business as well.

Investors exulted at a tiny government contracting win, but yawned at the much larger private industry sale. (This could also be a result of overall investment sentiment toward the stock market.)

Foolish takeaway
Moral of the story: This is good news, more good news, and bad news for Ceradyne investors. Good news because the longer investors insist in their minds on tying Ceradyne's future to government contracts, the longer the stock will receive outsized benefits from tiny government contracting wins. Good news, too, because the company is delivering on its promise to continue to develop new products to replace the government contract revenues that will dwindle whenever the Iraq war winds down.

And bad news? No matter how many deals Ceradyne does to manufacture pump seal faces, nuclear waste containers, or silicon semiconductor crucibles, it seems Mr. Market will continue to dis its success.

What else is Ceradyne up to? Find out in:

• Ceradyne's Nuclear Option