This week’s share tip is a developer of high-performance ceramic components that are sold primarily in the defence (62% of turnover) and industrial (30%) sectors. As I don’t have a PhD in inorganic chemistry, I won’t try to explain the details of the science. Suffice to say ceramic offers major advantages over traditional metals and plastics – it is harder, lighter, more durable and can withstand extreme temperatures.
Ceradyne (NYSE:CRDN), tipped as a BUY by Stanford Research
What’s more, Ceradyne is not another start-up “jam tomorrow” story. It is already profitable and is the top provider of lightweight body armour for the US military. Nor is it a one-trick pony. Its research pipeline is packed full of top-notch technology, such as “solar crucibles”. These ceramic pots are used in the blast furnaces, factories and ovens of solar-panel manufacturers. Chief executive Joel Moskowitz said that sales rocketed in the first half of this year, with revenues at $18m, six times greater than a year ago. To capitalise on this, the company is building a new factory in China to satisfy the huge demand, which should open in early 2009 and is seen delivering turnover of $100m next year.
The CEO also mentioned another terrific “$1bn-plus” opportunity, the group’s titanium diboride conductors, which could be deployed in over 30,000 aluminium smelters worldwide. The purpose of using titanium diboride to replace traditional carbon electrodes is threefold. First, electricity consumption can be slashed by about 20%, which cuts costs and allows smelters to operate for longer in countries (such as South Africa) where power is rationed. Second, the technology eliminates carbon dioxide emissions, and is thus more environmentally friendly. Thirdly, these products raise productivity and lengthen the electrode lifespan.
Mr Moskowitz also said that prospects for its new armour-plated combat vehicle, jointly developed with the Oshkosh Truck company of Wisconsin, were also excellent. This personnel carrier is designed to withstand attack from the most lethal weapons presently deployed in Iraq. Impressive stuff. Moving on to the hard numbers, at the end of June, Ceradyne had a healthy order book of $223m and net cash of $84m. The board expects 2008 turnover and underlying earnings per share of $710m-$750m and $4.25-$4.80 respectively. Those figures are expected to rise to $764m and $4.80 in 2009. That puts the stock on attractive forward p/e ratios of 8.4 and 8.0, far too cheap for such a hi-tech niche business.
So why the poor rating? Well, Wall Street is concerned that the US army may cut orders of body armour as the war in Iraq winds down. In September, Ceradyne issued a profits warning due to delays in signing a new deal with the military to supply the next generation of body armour – representing potential orders of up to 1.2 million sets. There are also dangers over Ceradyne’s reliance on the US government, which contributed over 70% of turnover in 2007 (although this should reduce in the future), while competition (for example, from ArmorWorks, Ceramtec, BAe Systems) is hotting up. UK shareholders also have to consider foreign-exchange risk.
That said, with leading technology, strong barriers to entry and excellent growth prospects, Ceradyne looks good value for the more adventurous investor.
Recommendation: med/high-risk BUY at $37
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.