Ceradyne: Despite Slowing Growth, Valuation's Still Cheap

This morning Ceradyne, Inc. (CRDN) reported its 2007 first-quarter results:

Sales for the first quarter increased 38.2% to a record $188.4 million from $136.3 million in the first quarter of 2006. Net income for the first quarter of 2007 increased 54.8% to a record $38.1 million, or $1.38 per diluted share, compared to net income of $24.6 million, or $0.90 per diluted share, in the first quarter of 2006.

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.

The year/year growth in orders of 14% and backlog growth of 12.7% are much slower than the 38% growth in sales over the last year, making it fairly clear that the sales growth will slow substantially. However, the fear isn’t so much of slow growth as it is that sales will actually decline once the military is fully stocked with body armor. The stock would be trading much higher than 13x trailing earnings if investors believed the company could continue to grow at the 12-15% rate indicated by orders and backlog.

CRDN 1-yr chart: