Now where have I seen this before? Oh yeah, just about every quarter. Ceramics specialist Ceradyne (NASDAQ:CRDN) -- which ought to send all shareholders a free bottle of Dramamine -- has tacked on about 15% from its low this week after it released word that sales and earnings for the upcoming quarter would be better than expected by the Street.
Quite a bit better, actually. For the first quarter, revenues are expected to come in about $135 million, and earnings should land somewhere around $0.89 per share, against an average estimate of $0.73.
Why the big surprise? Well, Ceradyne is one of those special companies that gets a decent amount of attention, yet is still misunderstood by a lot of those looking. On the one side, there's confusion among some analysts as to exactly how long the armor plate biz will power earnings. You need only look at the recent waffling from Friedman Billings to see this.
On another side, I see investors out there still lumping the firm together with soft-armor providers like DHB Industries (AMEX:DHB) or plate-producing competitors like Armor Holdings (NYSE:AH), which -- with its diverse array of defense-related products -- is a completely different beast from ceramics-focused Ceradyne.
Finally, there's not a great understanding of just how well Ceradyne can leverage its profitability when it gets good sales gains. Its manufacturing expertise has helped spin it into a virtual feedback loop, where greater capacity means better margins and higher revenues (due to increased orders from Uncle Sam). Uncle Sam likes to order from the company that can get the job done -- hence the recent "no-bid" order for side plates. The results Ceradyne hints at for Q1 are foreshadowed by last quarter's blowout numbers.
Next, Ceradyne has other untapped potential, including ancillary soldier armor plates, next-generation versions of body armor (the first orders for which began trickling in this month), and opportunities in vehicle armor, such as the system built on a Ford (NYSE:F) chassis and shown last fall. There are also non-military markets, such as engine wear components and the oil industry. The firm is tirelessly pursuing manufacturing opportunities in Mexico and Canada in order to reduce costs -- something it's already proven it can do via the new-ish plant in Kentucky.
Yes, many of these applications are in start-up phase and would be hard-pressed to make up for a big loss in armor plate revenue. On the other hand, the news out of Iraq hasn't been so great, and with Iran rattling nuclear sabers, I've got my doubts as to just how soon the U.S. will be able to stop buying basic protection for our soldiers.
The hard truth here is that Ceradyne is a company that the Street still doesn't "get," but management has kept finding ways to make it more profitable, and it's looking toward the future. Because the stock is volatile as heck, it offers investors plenty of chances to get in at a bargain price. If you like what you see, do yourself a favor and wait for the next panic.
Seth Jayson recommended Ceradyne for The Motley Fool's Stocks 2005 report, and it's returned more than 60% since then. At the time of publication, he had shares of Ceradyne, but no positions in any other stock mentioned. View his stock holdings and Fool profile here. Fool rules are here.
