So far this year, ceramics specialist Ceradyne (NASDAQ:CRDN) is batting 1.000 in the "earnings beats" department, exceeding expectations every quarter of the year. Will Monday's news on its Q4 and full-year 2006 results make this a clean sweep?

What analysts say:

  • Buy, sell, or waffle? Ceradyne's lost one analyst since last quarter, but still gets seven buy ratings and two holds. Looks like the lone seller lost interest.
  • Revenues. On average, the remaining analysts are looking for an even 50% sales growth to $171.4 million.
  • Earnings. Profits are predicted to nearly double to $1.18 per share.

What management says:
Several days prior to the official release of earnings, though, we can already start guessing that Ceradyne blew those numbers away. In a January preliminary earnings release, management advised that its Q4 sales were closer to $178 million. Moreover, it indicated that its earnings for the year "will be at the upper end of the guidance range of $4.45 to $4.55 per diluted share." This suggests that analysts' earnings-per-share guess, too, will be topped.

And that's just the beginning of the good news. According to CEO Joel Moskowitz, "the surge in orders and backlog" experienced in 2006 (including an additional $113 million in orders for body armor inserts announced after the guidance release) "provides good visibility for 2007." That should increase investors' confidence in whatever fiscal 2007 guidance Ceradyne gives us next week.

What management does:
What kind of guidance will that be? Hopefully news of more of the same of what we've already seen: Margins increasing across the board, and at every level (gross, operating, and net) for at least the last 18 months.

Margins

6/05

9/05

12/05

3/06

6/06

9/06

Gross

32.9%

33.9%

35.6%

37.5%

38.3%

38.5%

Operating

19.1%

20.0%

22.2%

25.3%

27.0%

28.2%

Net

11.2%

11.7%

12.7%

15.0%

16.4%

17.8%
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:
The crucial question for investors, though, hinges on Moskowitz's observation that "our positive operating performance as it relates to lightweight ceramic body armor is responsible, to a large degree, for the record preliminary results reported today." What happens when the war in Iraq ends, and presumably, the need for so much body armor lessens?

Don't think management doesn't see this, too. Moskowitz confirmed that the firm is "proactively seeking to diversify our product lines" in the areas of military vehicular armor, nuclear waste containment, and photovoltaic solar cell crucibles, among others. But don't assume that if and when military body armor orders fall off, the firm's other potential markets will generate the same kinds of mouthwatering margins you see above. In this Fool's opinion, investors' primary concern about Ceradyne shouldn't be whether it will run out of willing buyers for its wares, but whether its new products will prove as lucrative as the ones they replace.

Competitors:

  • Armor Holdings (NYSE:AH)
  • General Electric (NYSE:GE)
  • Goodrich (NYSE:GR)
  • Hitachi (NYSE:HIT)

Suppliers:

  • Honeywell (NYSE:HON)

Customers:

  • 3M (NYSE:MMM)

For more on Ceradyne's new (and old) markets, read:

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Fool contributor Rich Smith does not own shares of any company named above.