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Universal soldier
This could be the clear winner in modern warfare —
and the Bush administrations new military budget
by Adam Lass
After 55 years of Cold War arms dealing, just about every tin-horn despot out there has some fairly modern equipment. Heck, even downtown Baltimore street gangs now have enormous four-wheel-drive tankettes for their drive-bys. And when it comes to command and control, a Palm IV PDA makes GI Joe’s walkie-talkie look like a tin can on a piece of string.
The U.S.’s key advantage — its ability to bring overwhelming resources to the field — doesn’t do a bit of good in these little hit-and-run wars. In the 21st century, the odds are that we will not have any advantages in intelligence, infrastructure or manpower the next time we have to wade in and settle someone’s hash.
But ideas like the U.S. Land Warrior program are now percolate out of the back halls of the Pentagon. The simple thrust: equip our boys in green in forward positions with the same level of technology that the Air Force has been giving its pilots for years.
Loaded for bear
The new land warrior will be armed with multipurpose guns that see through walls and around corners — day and night — and can take out an enemy with either kinetic or explosive rounds. They will be tuned in to secure, encrypted battlefield Internets that are both vertically and horizontally integrated — meaning they will know what every other soldier, spook and general knows, in real time. And the brass can see the whole battlefield, from the headiest satellite heights to the view down the barrel of every soldier’s gun — again, in real time.
It doesn’t stop there. Your average grunt will be protected by body armor that would put a 20th-century tank to shame. Forget about flack vests. This stuff can stop a direct .50 cal. fusillade. All of this gear will be ultra-light, ultra-rugged and incredibly versatile, able to be reconfigured in the field for maximum effectiveness as new threats pop up and unpredicted challenges play out.
It may sound like science fiction, but it’s exactly what the president promised to the military last year.
Bigger ain’t always better
This paradigm shift in military thinking is already underway. Defense Secretary Donald H. Rumsfeld recently proposed sweeping changes in U.S. military strategy, including the formal abandonment of the “two major war” yardstick used to determine the size of the military. The possibility of having to fight wars in two places (Korea and Iraq are the black hats in the current favorite scenarios) is used to figure out the minimum number of troops, airplanes, ships and gear needed.
Losing this bloated strategy will remove a floor that for years has kept the active-duty military at about 1.4 million people, and free up resources for the new high speed, hyper-intelligent approach. The strategy responds nicely to the U.S. military’s new focus on East Asia over Europe. Our sources indicate that Rumsfeld has urged planners to do a better job of assimilating new information-age technologies and of countering the proliferation of missiles in the Third World.
You can expect to see a request for a supplement to current spending as well as an amendment to the proposed fiscal 2002 budget before Congress. Additionally, in the coming weeks, Rumsfeld will give the armed services broad guidance that will enable them to begin preparing their fiscal 2003 budgets.
Word has it that the White House is preparing a huge amendment to the defense budget for fiscal 2002, which begins October 1. The “placeholder” budget submitted earlier this year sought US$310.5 billion. Expect that to skyrocket by about US$20 billion.
First in war and first to the banquet table
In both the shooting and equity battlegrounds of the next century, the victory will go to the swift and the well prepared. The trick is to pick shares of companies that are already at the head of the line for land warrior monies — and that have interesting new programs ready in the wings to siphon off even more. Have I got a new pick for you!
Ceradyne designs, makes and markets advanced technical ceramic products and components for industrial, defense, consumer and microwave applications that meet or exceed specifications rival products made of metals or plastics can’t touch.
On the military front, Ceradyne has developed (and is currently producing) lightweight ceramic armor capable of protecting against threats as great as .50 caliber armor-piercing machine gun bullets. Compared to traditional steel armor plates, Ceradyne’s ceramic armor offer weight savings as great as 50% (for protection against .50 cal.) and 75% (against 7.62mm armor-piercing projectiles). Its hot-pressed Ceralloy ceramic armor plates are laminated with Kevlar, Spectra or fiberglass and formed into a wide variety of shapes, structures and components.
Ceradyne also produces conical, precision-tooled ceramic components that are designed to be mounted by its customers on the front end of defensive missiles. These nose cones, or “radomes,” are designed for applications where the velocities and operating environments are severe enough that the thermal shock and erosion resistance, high strength and microwave transparency properties of advanced technical ceramics are required.
Ceradyne’s industrial wear components are made primarily of its Ceralloy 147 sintered reaction bonded silicon nitride (SRBSN). These SRBSN ceramic components are frequently incorporated in industrial machinery where severe abrasive conditions can wear out vital components.
| Valuation Ratios |
| CRDN |
Industry |
Sector |
S&P 500 |
| P/E Ratio (TTM) |
| 11.75 |
19.83 |
18.13 |
28.77 |
| Price to Sales (TTM) |
| 1.29 |
1.2 |
1.59 |
4.2 |
| Sales (MRQ) vs Qtr. 1 Yr. Ago |
| 7.19 |
4.84 |
12.31 |
14.86 |
| Sales (TTM) vs TTM 1 Yr. Ago |
| 32.66 |
21.67 |
9.48 |
22.26 |
| Gross Margin (TTM) |
| 28.09 |
30.2 |
22.23 |
48 |
| Net Profit Margin (TTM) |
| 10.97 |
1.79 |
5.08 |
11.65 |
These wear-resistant parts are used to replace conventional materials such as tungsten carbide or ceramics such as alumina or zirconia. Applications include metal-cutting tool inserts, paper- and can-making equipment, and abrasive blasting nozzles.
Chips and dips
The newest equipment used to make semiconductor devices has to function in operating environments that are harsh enough to severely limit the life of traditional ceramic and metal components. Ceradyne is positioned to offer a new generation of non-oxide ceramics that have exceptional corrosion resistance. This is especially important to the expanding Asian 12-inch wafer market.
Fused silica ceramic does not materially expand when heated, or contract when cooled. Fused silica ceramic shapes of up to 14 feet in length are produced in the company’s facility located near Atlanta, Georgia.
Ceradyne also produces a wide variety of hot-pressed Ceralloy ceramic compositions — precision diamond-ground to close tolerances — primarily for microwave tube applications. The interior cavities of microwave tubes often require ceramic components capable of operating at elevated temperatures and in high vacuums.
Engines of wealth
The company has provided a number of civilian prototype parts made of Ceralloy 147 SRBSN materials for evaluation and testing in internal combustion and diesel engines. In the fourth quarter of 1999, the company began preproduction qualification of a component for a high-pressure fuel pump used in light duty diesel engines. Also, Ceradyne is engaged in a joint development program with Ford to develop ceramic components for automobile engines. Together with marketing partner 3M/Unitek, the company developed and marketed ceramic orthodontic brackets made of Ceradyne’s translucent ceramic, Transtar. This has resulted in a cosmetic substitute for traditional stainless steel brackets.
The payoff
The company’s industrial, defense, consumer, microwave tube and automotive products accounted for approximately 37.7%, 20.7%, 18.6%, 21.0%, and 2.0%, respectively, of net sales for the year ended December 31, 1999. Revenues from export sales represented approximately 11% of total net sales in 1999. For the year ended December 31, 1999, 3M/Unitek accounted for approximately 18% of net sales.
Sales for the quarter reached a record US$11.9 million, a 7% increase from US$11.1 million in the first quarter of 2000. Net income was US$1,189,000, or 14 cents per share diluted and basic, compared with net income of US$1,156,000, or 14 cents per share diluted and basic, in the first quarter of 2000. The tax provision for the quarter ended March 31, 2001, for the combined federal and state tax rate was 30%, compared with 2% in the year-ago quarter. Income before provision for taxes rose 44 percent from US$1,179,000 to a record US$1,699,000 in the first quarter 2000.
New bookings for the quarter also increased, rising 11 percent to US$11.7 million from US$10.5 million. Order backlog on March 31, 2001, was US$26.4 million, 16 percent higher than the prior-year backlog of US$22.7 million.
CRDN’s P/E of 11.75 handily beats the trade’s 19.83 and weighs in at about a third the S&P’s 28.77, while its price to sales figure of 1.29 is 1/4 the S&P’s 4.20. In years past, I might have turned up my nose at a double-digit P/E, but I will never walk away from year over year growth of 32.66%, especially not when that year was as bloody as the past one has been.
And, whereas CRDN’s gross profit of 28.09% (TTM) may be below the trade figure of 30.20%, it’s showing an unassailable net profit margin of 10.97% that dwarf’s the trade’s measly 1.79%, and return on assets and investment are equally superior.
Buy CERADYN, Inc. (CRDN:NASDAQ-NM) below US$8 with a target of US$16 over the next 12 months and a -25% trailing stop.
Adam Lass is co-editor and technical analyst of Options Underground, an options trading service.
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