Why I'm 'BULL'-ish on Ceradyne

Someone is selling Ceradyne (NASDAQ: CRDN); in fact it seems as though everyone is selling Ceradyne after the advanced technical materials company reported a quarter that appeared to be less than stellar. Ceradyne released earnings on Oct. 30th, but the news seems to have leaked a few days early, as hard selling hit the stock starting on Oct. 26th and continued for the next week. The company reported that Q3 EPS came in at $1.16, which was well below the $1.35 that the street was looking for. The earnings mishap was a result of after tax charges totaling $6.2MM, mostly related to R&D expenditures and the closing of two mergers during the most recent quarter. Therefore, the company's pro-forma results were $1.38/share.

The conference call was very revealing because the company chose to explain that the R&D expenditures were related the newest Ceradyne product, which is called the BULL. Ceradyne has teamed up with Oshkosh Truck Company and Ideal Innovations Inc. to develop this armored vehicle, which protects against a higher threat level than any other vehicle currently in production. The company stated that it submitted two vehicles to the government for testing on September 28, along with the company's proposal to the military. Joel Moskowitz, Ceradyne's CEO, went onto explain that the company submitted a proposal for delivery of 41,000 vehicles over a 5 year period. The company expects to hear back from the military in late 2007 or early 2008.

Moskowitz continued by saying that if the proposal was accepted the company would expect a small order in the beginning of 2008 and then a ramp up of orders over the course of the year. This product is the only vehicle to complete military testing to protect against EFPs, or an explosively formed penetrator, and conform to the government's stringent standards in the new armored vehicle program called MRAP II. If Ceradyne receives some orders, as it is expecting, this would have potentially tremendous implications for the stock price. The company released initial 2008 guidance, with EPS at $5.60 - $6.65, and revenue at $780MM – $1,067MM. The large disparity between the numbers reflects the uncertainty pertaining to the BULL and the upcoming 2008 XSAPI/ESAPI proposals. The lower end of guidance projects an 11% decline in the volume of body armor compared to 2007, which will be offset by growth in the company's solar and semi-conductor initiatives throughout the year. The higher range of the guidance reflects 550 vehicles that should be delivered over a 20 week period, during the back half of 2008.

On a valuation basis this company is incredibly cheap because it is trading at 10.1 times 2008's lower end earnings. If the company does receive the vehicle orders, the company trades at 8.5 times the highest end of 2008 earnings. This company is a screaming buy at this point and should deliver upwards of 10-15% appreciation over the next 12 months. I am sticking with Ceradyne as everyone jumps ship because management is strong, the company has a proprietary product that has many applications and because many of its products defend our soldiers. Believe in Ceradyne and be BULL-ish with me. DISCLOSURE: Steven was long Ceradyne at time this article was submitted.

Disclosure: Author has a long position in CRDN

Comments

[jeckle:]

This article was not exactly true. CRDN is not the only one in the race for MRAPs and not the only one that has passed tests. FRPT a small company has done so and has received orders, GD also, and FRPT allied with GD for machines with the EFPs. Also,Oshkosh submitted MRAPS in the first phase and they failed the test. Check your facts.

2007 Nov 12 05:01 PM

[User 119401:]

Everything that you said in this comment was true, but I think you are talking about MRAP I and I am talking about MRAP II, which calls for higher threat protection standards. FRPT and GD both did pass MRAP I, but CRDN is the only company to submit and pass using MRAP II standards. I did not mean to imply that CRDN was the only one in the race for these contracts, but I was simply trying to point out that this new product could have huge upside for the company. CRDN is the smallest of players in the market because it is new, and GD and FRPT will probably win most of the MRAP II contracts (which total almost $50 billion), but if CRDN takes 1-5% of the market that would be huge for a company that is just starting out. I appreciate your feedback, thanks for reading the article.

2007 Nov 12 10:16 PM

[raylo:]

okay

2007 Nov 12 07:56 PM