Ceradyne Raises Guidance On Solid Earnings Report

Ceradyne, Inc. (CRDN) reported 4Q'06 and FY2006 results today:

Ceradyne, Inc. today reported results for the fourth quarter and twelve months ended December 31, 2006.Sales for the fourth quarter 2006 increased 56.6% to a record $178.7 million from $114.2 million in the fourth quarter of 2005. Net income for the fourth quarter of 2006 increased 135.1% to a record $37.7 million, or $1.38 per diluted share, compared to net income of $16.1 million, or $0.63 per diluted share, in the fourth quarter of 2005. Fully diluted average shares outstanding for the fourth quarter were 27,443,000 compared to 25,479,000 in the same period in 2005.

Sales for the year ended December 31, 2006, increased to a record $662.9 million, up 80.0% from $368.3 million in 2005. For the year ended December 31, 2006, net income increased to $128.4 million, or $4.69 per diluted share, on 27,352,000 average shares outstanding, from $46.8 million, or $1.86 per diluted share, on 25,107,000 average shares outstanding, for the year ended December 31, 2005. Net income for the year ended December 31, 2006 was up 174.5% over last year, and earnings per diluted share for 2006 increased 152.2% compared to 2005.Fourth-quarter 2006 new orders were $313.5 million compared to $200.9 million in fourth-quarter 2005. For the year 2006, new orders were $730.1 million compared to $443.6 million in 2005. Total order backlog on December 31, 2006 was $344.3 million compared to the prior year backlog of $276.4 million.

We have known for some time that the near-term earnings outlook is very positive. The question is always what will come next, for once everyone in the military is supplied with body armor the sales should at best level out and could even drop off dramatically to a modest replacement pace. We said in early January:

While the news has lifted the shares this morning, it will be more interesting to see what the company predicts for 2007 when they hold their conference call in late February. So far the company has not only beaten consensus estimates but even the most wildly bullish ones. However, we are still concerned that military body armor orders are peaking and the leverage will work both ways.

On the conference call, the company raised its 2007 guidance to $720-740 million of sales and $5.20-$5.40 in EPS. The consensus estimate is for $178 million in sales and $1.24 in Q1 EPS and for $716 million in sales and $4.96 in EPS for 2007. The improvement remains based on the orders they have received, as well as preliminary discussions with the military for body armor. While management stressed opportunities to diversify the revenue stream away from body armor, the overwhelming dominance of that product line makes the strategy by necessity a long-term one.

CRDN 1-yr chart: