Ceradyne Updates Guidance
Ceradyne announced at its first Analyst Day at its Costa Mesa and Irvine, California, manufacturing facilities, the reiteration of its 2006 guidance of a sales range of $590 million to $610 million and an earnings range of $3.80 to $4.00 per diluted share.
Additionally, Ceradyne provided early 2007 guidance of a sales range of $665 million to $680 million with earnings of $4.25 to $4.50 per diluted share.
We have written several times about Ceradyne, which supplies body armor to the US military. The stock has been one of the fastest growers over the last couple of years, which attracted plenty of attention. As we warned, the growth was unlikely to continue since the company was already making as much armor as the military needed to fully equip the forces, and once that was over the concern would be whether the company could maintain, let alone grow, revenues.
Against that concern, the valuation appeared relatively attractive. When the company announced Monday’s analyst presentation, we sold put options that will require us to buy shares for $45 later this month should the share price remain below that level. Our thinking was:
- Companies seldom call an analyst day to deliver bad news.
- The shares are at a fairly attractive price we won’t mind paying if the puts are exercised.
- If the shares rise, we will still participate in some of the upside.
- If the shares fall the puts lower our effective purchase price.
The 2007 guidance is for approximately 10 percent increases to both revenue and earnings per share. Management pointed out that such early guidance is highly speculative.
Because of the early timing of this guidance, we caution the financial community that this guidance has an even greater uncertainty than Ceradyne’s prior annual guidance projections. We do not now have the backlog of orders to support these projections, nor are there clear assurances we will receive sufficient orders to meet these guidance numbers.
“The 2007 guidance represents Ceradyne management’s estimates and projections as of June 2006 as to what all of 2007 will look like from organic operations. It is based on our current understanding of 2006 and, in good part, relies on receiving continuing orders from the U.S. Army for ESAPI and ESBI (side plates).”
The 10 percent is far lower than the last couple of years, and lower also than some hopeful investors were budgeting. But it is better than our base-case scenario, and far better than our worst case. Furthermore, as uncertain as it is it is now known what management believes they can do. And over the next few months it should act as a reasonable buffer, keeping the bulls from getting too bullish or the bears too bearish. And that’s okay with us.
Disclosure: As the article noted, the author is short put options on Ceradyne, with a $45 strike price and June exercise date.
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