Ceradyne (CRDN)
Ceradyne manufactures body armor, primarily for the US military. As you may imagine, demand has been strong. The stock, however, has been weak despite significantly beating earnings and raising guidance. Although some have taken this as a sign of limited downside, others remain concerned that orders will decline going forward.
We think both sides may be right. Orders will slow, as the military gets fully equipped. However, the level of demand should stay strong for a couple of years, providing the firm with an opportunity to develop new products for both military and commercial use. Other defense firms in a similar situation include Armor Holdings (AH) and Alliant Techsystems (ATK) which trade at 14x and 16x forward earnings, respectively. Based on consensus expectations, CRDN is right in the middle of that range. Should they again raise guidance (quite possible since there was an RFP for body armor that has not yet translated into orders) there could indeed be room for upside.
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[…] Analysts were expecting the company to earn $1.32 per share on $180 million in sales. We have discussed Ceradyne’s operating leverage in the past, and noted that what is more important than the quarterly results is whether they will prove sustainable. The company did not provide guidance in the earnings release, but did provide some indications of future potential: First-quarter 2007 new orders were $176.5 million compared to $154.7 million in the first quarter of 2006. Total order backlog on March 31, 2007 was $332.3 million compared to the prior year backlog of $294.8 million. […]