Back in July, fellow Fool Seth Jayson put things this way: "What I like best about Ceradyne (NASDAQ:CRDN) is the way it is positioning itself for a future when sales of body armor will slacken." I couldn't agree more. For the time being, the maker of ceramic plate armor can depend on the Iraq war and ongoing military operations in Afghanistan and elsewhere to provide revenues in return for providing troops with life-saving body and vehicle armor.
Just take a look at the company's financial results for the year to date: Sales are up 94%; earnings, 168%; earnings per diluted share, 130%. Sure, some of those profits came with the package when Ceradyne bought out one of its erstwhile suppliers, ESK Ceramics, but Ceradyne still attributed much of its success to continuing strong sales of body armor to the U.S. military. And sad to say, demand for these Ceradyne products continues to grow. Yet all bad things come to an end, and we all -- Ceradyne investors included, I would think -- hope that at some point the worldwide conflicts will relent and the need for, and profits from, body armor sales will dry up.
It's against that eventuality that Ceradyne is taking positive steps to diversify its customer base. The ESK acquisition gave Ceradyne access to the 97% of ESK's customers that aren't involved in the defense industry. And Ceradyne continues to expand its facilities devoted to production of ceramic diesel engine parts. The company is also diversifying its defense offerings, adding more capacity to produce vehicle armor, a niche where the company competes head-to-head with larger armor maker Armor Holdings (NYSE:AH) but also a niche in which its similar-sized rival, DHB Industries (AMEX:DHB), does not compete.
Diversification in this manner seems prudent, and Ceradyne should be commended for protecting its shareholders' investment this way. There's just one more thing that this Fool would like to see the company do in that regard: provide investors with a cash flow statement to accompany its earnings releases. For without a clear showing that the company's current and future businesses are paying off in cash, an investor can rely only on the company's historical cash flow numbers, as provided on Yahoo! (NASDAQ:YHOO) Finance for example. And since those show Ceradyne to have an enterprise value of $650 million but trailing 12-month free cash flow of just $2.5 million, well, an investor could get awful nervous over numbers like those.
For more Foolish analysis of Ceradyne and the other armor makers, read:
Fool contributor Rich Smith has no interest in any of the companies mentioned in this article.
