"Ceradyne earnings slip in second quarter" -- MarketWatch
"Ceradyne profit falls, narrows outlook" -- Reuters
And then AP, quizzically: "Ceradyne 2Q profit falls, shares rise"
As you know, Ceradyne (NASDAQ:CRDN) reported its second-quarter earnings last week. The headlines above, though, suggest that this was hardly cause for rejoicing. So why, pray tell, are the shares up 15%? For the answer to that puzzler, you've got to go to the post-earnings conference call.
Yawn
I know, I know. Conference calls are boring. They're long. They're extra work. In a perfect world, anything worth knowing would already be in the earnings release, obviating the need to do your research twice.
Unfortunately, our world isn't perfect. Fortunately, we at the Fool can help make it more perfect -- by listening to the conference call for you, and giving you the skinny. Without further ado ...
Why Ceradyne spiked 15%
It's not because of the earnings. As the mainstream press correctly observed, Ceradyne hasn't been burning any barns lately. Sales so far this year are flat against last year. Gross margins slipped (to 39.4%). Income taxes rose. Consequently, profits are down 12%, to $2.45 per share.
But here's why it did
The real reason Ceradyne's stock looks shiny and new boils down to three words: solar, armor, and aluminum. Let's start with the hottest name in investing in a $120-a-barrel-world:
Solar
Ceradyne has historically been viewed as a "defense stock." With two wars under way, demand for the company's ceramic body armor spiked, taking Ceradyne's profits with it. Now that peace may be breaking out in Iraq, the armor business is in doubt, and Ceradyne needs to replace that revenue ... fast.
Enter "solar crucibles." One of Ceradyne's new business lines is making ceramic pots that go into GT Solar's (NASDAQ:SOLR) furnaces ... at LDK Solar's (NYSE:LDK) factories ... to bake up polysilicon for Suntech's (NYSE:STP) solar panels ... to sell to Akeena Solar for final installation on your roof. So this isn't even a pick-and-shovel play on solar -- it's more like a hickory-handle-and-pick-moldings play.
Ceradyne's solar business basically stole the show on the post-earnings conference call. You see, CEO Joel Moskowitz has conceded that the new revenue streams his company has been developing carry expenses "generally higher than those attributable to body armor. So, we are not quite able to replace body armor revenue dollar for dollar in terms of equivalent profit margins." And yet, the solar business may in one stroke solve both Ceradyne's sales and profits dilemmas.
Sales of ceramic crucibles used to bake silicon used in photovoltaic cells are growing exponentially. One year ago, Ceradyne sold $1.9 million worth of crucibles. In Q2, sales sextupled to $11.2 million. To capitalize on this market, Ceradyne is building a new 330,000-square-foot facility in China, right next door to the 200,000-square-foot factory we told you about last quarter.
Meanwhile, the profits on these sales provide, in Moskowitz's words, "exceptional margins."
So that's it for the armor biz?
Not quite. As demonstrated by this post-earnings press release, body armor sales are still chugging along. Hoped-for sales of "BULL" MRAP-IIs appear to be on hold, though. Ceradyne is not counting on "any BULL deliveries in 2008." So while there's still a 5-year IDIQ contract on the table, until we hear otherwise, you should probably pretend there isn't.
On the other hand, we may soon hear good news on the JLTV front. Ceradyne Armor Systems President Marc King tells us: "We are very, very optimistic that our armor development efforts in the area of lightweight composite armors is moving ahead quiet nicely. ... We are moving ahead with some of the OEMs ... again the secrecy agreements that we have with these folks prevent me from going into any more detail." Most likely, everyone from BAE to General Dynamics (NYSE:GD) to Lockheed Martin (NYSE:LMT) is bidding on JLTV.
Moskowitz's billion-dollar baby
And now a little something for the chemistry majors out there. Joel Moskowitz has in the past alluded to "a $1 billion-plus market" for Ceradyne's titanium diboride conductors in smelting aluminum. He elaborated on that Friday:
The purpose of using titanium diboride to replace carbon [electrodes] is threefold. First, you reduce the amount of electricity by as much as 20%. Second, you decrease the carbon dioxide emissions ... [C]urrently, when you make aluminum, you put out more carbon dioxide than you do aluminum. And this is a serious problem in today's world, particularly with the focus on greenhouse gases and global warming. ... the oxygen that comes off the mineral grabs on to the carbon from the electrode. So if you change the electrode to titanium diboride ... [y]ou put out oxygen, not CO2.
Foolish takeaway
Is this bit of esoteric chemistry really enough to double Ceradyne's annual revenue? I'm afraid RusAl and Alcoa (NYSE:AA) get the final vote on that one, but as Kyoto regulations begin to kick in, I can certainly see why the technology would interest them. Basically, it’s a mixure of solar, armor, and aluminum that has captured the market’s attention when it comes to Ceradyne.
Related Foolishness:
