One quarter is all that's lacking for ceramics specialist Ceradyne (NASDAQ:CRDN) to complete four straight years of never missing estimates on an earnings report. When the company reports its third-quarter 2006 results Wednesday morning, can it keep its winning streak alive?

What analysts say:

  • Buy, sell, or waffle? Ten analysts follow Ceradyne, with seven of them rating the stock a buy, two a hold, and one a sell.
  • Revenues. On average, they're looking for 72% sales growth to $162.4 million ...
  • Earnings. ... and a 117% jump in profits to $1.15 per share.

What management says:
The big news at Ceradyne this quarter actually came out just days ago. On Oct. 24, the firm completed its internal investigation into possible backdating of stock options, concluding that it had done nothing wrong -- or at least nothing intentionally wrong. Numerous irregularities were uncovered, however, and as a result, the firm revised its Q2 earnings numbers downward by $0.03. The good news: Management says no further restatements are necessary, it filed its second quarter 10-Q with the SEC, and it seems to consider this matter closed. (The bad news: The Feds haven't yet given Ceradyne the all-clear. At last report, the SEC still had an informal investigation going.)

Getting back to the business, in June, management estimated that it would book about $600 million in sales this year, and earn roughly $3.90 per share on these sales; and that in 2007, sales could rise as high as $680 million and profits as high as $4.50 per share. Although it did not expressly reaffirm these targets in last quarter's earnings release (maybe it was too preoccupied counting stock options), neither did it change them. Therefore, it's probably safe to assume these still hold as through-December objectives.

What management does:
As you can see below, Ceradyne is mating continued strong margins growth to continued strong sales growth. With nearly $300 million in sales already booked in for the first half of 2006, and the now-revised profits standing at $1.97 per share, the company looks well-positioned to hit its sales and profits targets.

Margins %

3/05

6/05

9/05

12/05

3/06

6/06

Gross

31.9

32.9

33.9

35.6

37.5

38.3

Op.

18.6

19.1

20.0

22.2

25.3

27.0

Net

11.5

11.2

11.7

12.7

15.0

16.4
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:
I wish I had something original to tell you here -- a sudden spike in inventories, or a halving of raw material costs, perhaps. Sadly, Ceradyne remains boringly, if impressively, consistent in maintaining strong growth in sales and profits, without attendant growth in much else.

On the income statement, year-to-date sales are up 86%, and neither cost of goods sold (up 71%) nor selling, general, and administrative expenditures (up 34%) are outpacing them. The result is the margin expansion you see above. Also par for the course, over on the balance sheet, accounts receivable growth (52%) and inventory growth (34%) also remain comfortably slower than the company's sales improvement. Basically, but for the stock options issue -- which may itself have been put to rest now -- Ceradyne is doing remarkably, snore-inducingly fine.

Competitors:

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

Suppliers:

  • Honeywell (NYSE:HON)

Customers:

  • 3M (NYSE:MMM)

Read more about Ceradyne's financial successes and moral failings in "Ceradyne's Broken Armor."

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