Over the past 12 quarters, ceramics specialist Ceradyne (NASDAQ:CRDN) has consistently blown analyst estimates out of the water. Can the company make it a baker's dozen? I think yes, and by this time tomorrow, we'll know for sure. The company reports its Q4 and full-year 2005 numbers before market-open.

Wall Street Wisdom:

  • General consensus. Nine analysts follow Ceradyne, with six of them rating the stock a buy and three a hold. Not a sell in sight.
  • Revenues. Analysts will be looking for 29% growth in quarterly sales tomorrow, to $107.9 million.
  • Earnings. 29% won't cut it for profits, however. The stock needs to produce $0.59 per share in profits, and achieve 44% year-over-year growth, or risk being shellacked.

Margin watch:
Now here's an interesting situation. Ceradyne has seen its rolling gross margin increase 310 basis points over the past 18 months. Its operating margin took a dip, but at last report was right about back to where it was a year-and-a-half ago. But it's netting 2.3 fewer pennies in profit per dollar of revenue now than it was way back when.

Margins %

6/04

9/04

12/04

3/05

6/05

9/05

Gross

31.7

32.5

33.4

33.1

34.1

34.8

Op.

20.9

21.5

21.5

19.8

20.3

20.8

Net

14

13.9

12.8

11.5

11.2

11.7
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish forensics:
This tells us three things. First, Ceradyne retains pricing power. It's increasingly selling goods for more than it costs to build them. Second, operating costs are not running amok. Even though administrative and R&D expenditures have nearly tripled as sales just doubled over the past year, they remain a small enough proportion of Ceradyne's costs to have not yet hurt the company's operating margins. Two things are hurting the firm's net: higher interest payments on its debt and a single $3 million charge for restructuring.

The latter won't be a problem tomorrow -- it will slide off the left-hand side of the rolling yearlong tally of Ceradyne's results. The debt, which was taken on to finance the firm's $136 million buyout of ESK Ceramics back in 2004, will continue to drag on Ceradyne's net -- but perhaps not so much as in quarters past. Ceradyne recently announced a convertible debt offering which will replace its credit facility with low-interest commercial paper.

The convertibility of the new offering could dilute Ceradyne's share count, of course. But if a little dilution is what it takes to acquire ESK Ceramics and its sales base (which now constitutes 17% of Ceradyne's total sales) and reduce the interest payable in relation to that acquisition, I doubt investors will mind.

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