Ceradyne Earnings
Ceradyne (CRDN) reported huge gains in revenue and earnings. They also increased their guidance for the remainder of the year. Yet the stock was flattish despite, according to Motley Fool, management predicting a strong market through 2007. Aye, but there’s the rub. There is a difference between “strong” and “growing.” At $3.80-4.00 per share, the new guidance for this year is also probably close to the maximum potential earnings unless there is either a large new opportunity or the company decides to steal revenue from future years.
See, the military could potentially order 1 million sets of body armor. If they do, that could keep Ceradyne humming at the current production levels through 2008 or 2009. But unless they order the next generation body armor after that, or CRDN is able to branch out into other product lines, there is no growth to the numbers. Ceradyne could add capacity and shift some of the sales from 2009 to earlier periods, but that would just derail the gravy train earlier. So we have strength rather than growth.
What is strength worth? As we noted before, Alliant Techsystems (ATK) and Armor Holdings (AH) have found themselves in a similar situation. ATK is trading at 16.5x forward earnings, while AH is trading at just above 13x. CRDN at $54.50 is trading at 14x the midpoint of the new guidance, which looks about right. No wonder there wasn’t a big reaction to the news.
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