Ceradyne Raises Guidance
Ceradyne’s (CRDN) conference call yesterday had several bits of good news. For one thing, the conclusion of the company’s probe into stock option practices allowed them to file their 10Q and avoid potential delisting.
More important, however, was a significant increase to earnings guidance:
Based on the strong third quarter reported today and the anticipated fourth quarter, we now feel that the 2006 guidance should be revised upwards to a sales range of $650 million to $660 million with an earnings range of $4.45 to $4.55 per diluted share.
Furthermore, we now believe that the 2007 guidance provided on June 5, 2006 of a sales range of $665 million to $680 million and an earnings range of $4.25 to $4.50 per diluted share should be revised upward to a sales range of $700 to $725 million with an earnings range of $5 to $5.15 per diluted share. This upward revision is based on non-binding discussions with the United States government, our current backlog of orders including our indefinite delivery indefinite quantity contracts which are not reflected on our backlog until we actually receive delivery orders, our improved efficiencies and expanded production capability in most Ceradyne defense and nondefense
facilities.
Although the stock rallied sharply to close above $47, that still is a multiple barely above 9x next year’s earnings. Although investors are clearly skeptical that the company can generate much more growth (as we have written previously) it is also hard to imagine the shares declining much farther until earnings actually do level out or decline.
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How can Ceradyne issue higher guidance when all new orders are simply releases of existing backlog? If backlog does not get replaced, the slope in sales will be like all defense contractors back in 1994-1997 (Democrat years). Also, what is the effect on earnings of the class action law suit?
Well, the answer to the first question is fairly simple. Their guidance didn’t assume as large a release from backlog, therefore releasing the backlog will raise guidance (for 2007, at the expense of future years.) As you rightly note, this will flatten the slope of sales growth considerably, which is why the stock is trading at a single-digit multiple.
As far as the earnings effect from the lawsuit, who knows? We’d still be more comfortable owning CRDN and taking the lawsuit risk than in holding most of the other names that have gotten backdating suits and that trade at higher multiples.
[…] We have done about as well this year betting that Ceradyne (CRDN) would not go down as we could have betting it would go up (click on the link for the distinction.) The company has significantly raised guidance (twice) so coming in at the high end should have been somewhat expected: For the year, sales reached $663 million, 80 percent above the $368 million reported in 2005, and total new orders hit about $730 million, up 64 percent year-over-year. Due to the strong demand for its services, Ceradyne predicts full-year earnings will come in at the high end of its $4.45 to $4.55 per share range. […]