Investment Jungle

Finally having found a stock that was available for less than its sticker price (but still higher than its MOS price), I decided to delve deeper int0 this business. In order to delve deeper, I read their 10K Annual Filing.

The Business:

So, what is Ceradyne Inc. all about?

From their 10K Annual Filing:

We develop, manufacture and market advanced technical ceramic products, ceramic powders and components for defense, industrial, automotive/diesel and commercial applications.

In many high performance applications, products made of advanced technical ceramics meet specifications that similar products made of metals, plastics or traditional ceramics cannot achieve. Advanced technical ceramics can withstand extremely high temperatures, combine hardness with light weight, are highly resistant to corrosion and wear, and often have excellent electrical insulation capabilities, special electronic properties and low friction characteristics.

Our products include:

• lightweight ceramic armor for soldiers and other military applications;
• ceramic industrial components for erosion and corrosion resistant applications;
• ceramic powders, including boron carbide, boron nitride, titanium diboride, calcium hexaboride, and zirconium diboride, which are used in manufacturing armor and a broad range of industrial products;
• evaporation boats for metallization of materials for food packaging and other products;
• durable, reduced friction, ceramic diesel engine components;
• functional and frictional coatings primarily for automotive application
• translucent ceramic orthodontic brackets;
• ceramic-impregnated dispenser cathodes for microwave tubes, lasers and cathode ray tubes;
• ceramic crucibles for melting silicon in the photovoltaic solar cell manufacturing process;
• ceramic missile radomes (nose cones) for the defense industry; and
• structural neutron absorbing materials in combination with aluminum metal matrix composites that serve as part of a barrier system for spent fuel storage and dry storage in the nuclear industry.

Wow. Can I say I understand the business? In a general sense, yes. But definitely not something I could explain in 2 sentences or less.

The Big Five

These were calculated in my last post and were all amazing.

Debt

Looking through the filing, there is long term debt of $121,000,000. Net cash provided by operating activities for 2006 was $139,227,000. This net cash is easily able to pay off this debt quickly. So debt is not an issue for this business.

Analysts

There are 10 analysts following this stock. Summary of their opinions:

• Strong Buy: 4
• Buy: 1
• Hold: 3
• Sell: 1
• Strong Sell: 1

Insiders

Here is a list of the company insiders:

Name Age Position

Joel P. Moskowitz 67 - Chairman of the Board, Chief Executive Officer and President
David P. Reed 52 - Vice President, President of North American Operations and Assistant Corporate Secretary
Jerrold J. Pellizzon 53 - Chief Financial Officer and Corporate Secretary
Michael A. Kraft 44 - Vice President of Sales, Marketing and Business Development
Peter Hartl 50 - Vice President and President of ESK Ceramics
Marc King 60 - Vice President of Armor Operations
Bruce Lockhart 44 - Vice President and President of Thermo Materials
Jeff Waldal 42 - Vice President and President of Semicon Associates
Kenneth R. Morris 53 - Vice President, Operations
Matthew Karmel 56 - Vice President

Checking their insider transactions does not show much. A little bit of selling, but very minor. No purchasing of any shares either.

Competitors

Kyocera Corporation (KYO) was listed as a competitor. This is a huge company with a market cap of $18.75B (compared to CRDN market cap of $1.74B). KYO is definitely more diversified with many subsidiaries ranging from telecommunications equipment, solar energy systems, and industrial ceramics. I will definitely need to do some research on this company.

Risks

There are some significant risk.

A substantial portion of our revenues is derived from the sale of defense related products, primarily ceramic body armor. If demand for ceramic body armor declines, if federal budget appropriations involving our products are reduced, if we fail to obtain new government contracts or delivery orders under existing contracts, or if existing government contracts or orders are cancelled, our revenues, profit and cash flow will be materially and adversely affected.

They are not kidding. Ninety two percent (92%) of their revenues come from their armor business line.

If we fail to increase our non-defense revenue, and if the demand for ceramic body armor decreases, our revenues, profit and cash flow will be materially and adversely affected.

I would say that this is an understatement! CRDN really relies on the ceramic body armor business since 92% of their revenues last year came from that business line.

Many defense contracts are awarded in an open competitive bidding process, and our past success in winning government contracts does not guarantee that we will win any new contracts in the future. Our success depends upon our ability to successfully compete for and retain such government contracts.

Even the contracts they have are not guaranteed as the government uses an open competitive bidding process.

The Tools

Looking at the 3 tools (MA, MACD, and stochastics), they are all showing a BUY signal.

Conclusion

Although this stock is priced above its MOS price (which means that we don’t have the 50 cents on the dollar margin of safety that we want), everything else is pointing to this stock as a BUY. The Big Five and the 3 tools are all positive.

However, I feel that you can almost consider this stock a commodity stock. How so? Well, as long as the wars are going strong, they will have large demand for their ceramic body armor product. But if the wars end, then there will not be the requirement for all that armor. And if they lose their government contract, then bye-bye revenues and bye-bye stock value. So this company seems to be a play on war. And that makes this a cyclical stock in my opinion.

Personally, this is not the type of company I would be comfortable investing in. I would prefer to find a non-cyclical business that methodically moves forward in all times of environments. Due to the huge reliance on their ceramic body armor product, I find this business too risky.  Too many eggs in the one basket.

I hope you found this analysis interesting and helps stimulate your own investing ideas.

Popularity: 7%