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Ceradyne, Inc. CRDN

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Today, May 12, 2008, I purchase stock in Ceradyne (CRDN). Adhering to a value investing philosophy, it may be helpful to describe why I believe this stock currently trades at a significant discount to its intrinsic value.

Ceradyne is most prominently known for the body armor that it produces in support of the US military, but Ceradyne has his hands in a number of different industries. The description of the company, according to its SEC filings is as follows:

Ceradyne, Inc., together with its subsidiaries, engages in the development, manufacture, and marketing of technical ceramic products, powders, and components for defense, industrial, automotive/diesel, and commercial applications in the United States. It offers lightweight ceramic armor for soldiers and other military applications; ceramic industrial components for erosion and corrosion resistant applications; and ceramic powders, including boron carbide, boron nitride, titanium diboride, calcium hexaboride, and zirconium diboride, which are used in manufacturing armor and a range of industrial products. The company also provides BORONEIGE boron nitride powder for cosmetic products; evaporation boats for metallization of materials for food packaging and other products; ceramic diesel engine components; functional and frictional coatings primarily for automotive applications; 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 for the defense industry; and fused silica powders for industrial applications and ceramic crucibles. In addition, Ceradyne’s product portfolio includes structural and nonstructural neutron absorbing materials; nuclear chemistry products for use in pressurized water reactors and boiling water reactors; boron dopant chemicals for semiconductor silicon manufacturing and for ion implanting of silicon wafers. It serves the U.S. government; prime government contractors; and industrial, automotive, diesel, and commercial manufacturers. The company was founded in 1967 and is based in Costa Mesa, California.

While national defense has never gone out of fashion, the company’s focus on creation of silicon suitable for solar energy may represent its most promising new line of products.

Given this as background, let’s begin the process of considering the company’s intrinsic value in comparison to its current stock price of $39.13 (today’s close). I should warn the reader that this effort will be graphics intensive, with approximately 40 charts and graphs. Every investor is entitled to an opinion concerning the legitimacy and prospects of each new position, but, absent tangible and quantifiable support, no prospective investors should view my opinion as possessing greater legitimacy than any other.

To identify company’s intrinsic value, it is necessary to consider the company’s fundamentals (i.e., financials) from a number of different perspectives. We will, therefore, perform discounted cash flow analysis, identify the company’s net asset value, consider replication value and Earnings Power Value (EPV), the strength of its financial statements for the most recent year, and, finally, consider its current stock price in comparison to the company’s estimated intrinsic value.

We start with an overview page:

It is from this page that we will perform initial discounted cash flow analysis, to include sensitivity analysis. Allow me to draw your attention to the upper left-hand corner of this page, where, based on the company’s proven cash flows, we have our first indication of unadjusted intrinsic value:

This indicates that the stock price at close of business today was $39.13, with an intrinsic value of $48.51, and, if seeking a 50% margin of safety, would warrant purchase at $24.25 or below. At its current price, however, the stock is selling at a 19.34% discount, with an upside potential of 23.97%. Additionally, the price to free cash flow return is 10.53% — which significantly exceeds current rate for the 10 year bond, at 3.7%. Next, let’s consider how we arrived at this set of conclusions.

Above, are the basic figures on which our subsequent calculations will follow. Please note the relative stability of the number of shares outstanding and a more than adequate coverage of current liabilities by free cash flows. Next, is a graph that seeks to identify the relative stability for several of these key items.

Please note that cash return on invested capital significantly exceeds the standard threshold of 13% (providing a margin of comfort during negative economic cycles). Moreover, free cash flows are increasing and relatively stable, and, both, book value and shareholders equity have risen nicely and consistently over the past 10 years. This level of consistency is necessary if seeking to apply discounted cash flow analysis — a tool that was largely created to identify the value of bonds, given their known income streams. Use of discounted cash flow analysis, therefore, is appropriate in this case.

Consequently, it is necessary to identify appropriate growth rates for, both, free cash flows and cash return on invested capital. Eventually, we will use free cash flows to identify intrinsic value, since the worth of a company is the amount of cash that may be taken out of it over its lifetime — discounted back to present day. Cash return on invested capital, however, represents an upper constraint, since, over time, free cash flows cannot grow at a rate greater than cash return on invested capital. Because performance results may prove mercurial in any given year,, it is necessary to smooth the historical growth rates. Ordinarily, we would do this with simple averages, but the influence of a single outlier may skew the mean and distort the result. Therefore, we take the median of rolling five-year and seven-year mediams, using the financial data for the past decade, provided by MorningStar.

This indicates a free cash flow growth rate of 0%, with cash return on invested capital growing at just under 2.5%. It is, therefore, appropriate to use the 0% free cash flow growth rate in our calculations. This will provide the basis off of which adjustments may be subsequently made, if anticipating a more significant growth rate (or, alternatively, declines). From this, we project free cash flow growth out in the future — using the 0% growth rate for the next decade, followed by a 5% growth rate for the decade following. Here are the results:

Many who perform discounted cash flow analysis employ a 10% discount rate to identify the net present value of anticipated future cash flow streams. We will be 50 percent more conservative and use a 15% discount rate, followed by use of current shareholders equity in place of the continuing value of the firm (i.e., the company’s value beyond the next 20 years). This gives us a total valuation for the company of $1.3 billion, with a per-share value of $48.51.

Next we insure that the company is generating cash returns on invested capital in excess of its weighted average cost of capital — which takes into account the company’s debt and the expected return on its equity.

While the cash return on invested capital (15.4%) in the most recent year exceeded its 10 year median of 2.4%, this figure significantly exceeds its weighted average cost of capital in the most recent year (8.08%) — with the vast majority of that attributable to expected returns on equity.

Since the most recent year’s cash return on invested capital significantly exceeded its 10-year medium, it would be beneficial to identify the extent to which the stock is undervalued in relation to its intrinsic value at various free cash flow growth rates.

As expected from our previous calculations, the stock is undervalued by 19% if free cash flow growth is 0% over the next decade. If, however, free cash flow growth increases to the 15% rate of cash return on invested capital (last year), the stock is undervalued by approximately 56%. As we will see when diving more firmly into the financials, this assumption of a more significant growth rate is easily supported. It is, therefore, necessary to consider intrinsic value based on this higher growth rate.

Please note that, rather than a 15% free cash flow growth rate, I have employed a 11.3% rate. In order to be conservative, I’ve reduced the 15% growth rate by 25%. As you will note at the top left-hand corner, intrinsic value becomes $74.50 — rendering a discount at today’s price of 47.47%. This is close enough to my required 50% margin of safety to warrant purchase based on discounted cash flow analysis alone.

The stock market is largely driven by emotion over the short term. Without emotion, it would not be possible to find equities that are so thoroughly undervalued. Over time, however, the market is compelled to more accurately value a company and its prospects. Eventually, the market simply cannot ignore exceptional results. Value investors, therefore, are, of necessity, a patient lot. Given this, we should consider compounded annual returns at varying time frames if assuming that the market will eventually reflect Ceradyne’s intrinsic value.

While the market typically comes to its senses in something under 18 months, we may reasonably expect to hold the stock for as long as three years. If, however, free cash flows expand at just over 11% in the next decade and the market accurately identifies the intrinsic value of the company at some point between 18 months and three years in the future, our compounded annual return will come in at somewhere between 53.61% and 23.94%. Even if taking as long as 5.5 years, the 12.42% return is in line with the stock market’s average performance.

Book value represents a rough estimate of the net asset value of the company. At $22.70 (in comparison to the current price of $39.13), price to book value is 1.71 — just over Benjamin Graham’s ideal of 1.6. Net asset value, however, is a most conservative basis on which to value the company, since it considers only the tangible assets of the company valued at the price paid at purchase. A more appropriate estimate of intrinsic value is replication value — i.e., the amount a startup enterprise would expect to pay in order to duplicate Ceradyne’s current standing. Here are the calculations necessary to identify the company’s replication value:

By my calculations, $17.32 represents the replication value — rendering a price to adjusted book value of 2.26 (well under the threshold of 2.50).

While it is beyond the scope of this analysis to go into the details, Earnings Power Value (EPV) places a value on the firm’s franchise.

Please note that, at the company’s 8.08% cost of capital, Ceradyne’s EPV is $77.16 — marginally above our adjusted discounted cash flow value of $74.50. To the extent that this figure exceeds the company’s replication value (over time), it is expected that it’s intrinsic value will grow. At its core, franchise value (EPV) identifies the extent to which capital deployed toward future growth generates an added return on that investment.

All of this assumes that the company’s financial posture is healthy. So, let’s take a look at its financials.

With revenues growing at a faster rate than cost of goods sold, operating income is advancing nicely. It may be noted that the rate of growth for operating income appears to be leveling off, but this is before taking into account several growth initiatives related to, both, the armoring of military transport vehicles and creation of products related to solar energy.

Given these plans for growth, it makes sense that the company is spending on, both, sales and research and development — the two key components of operating expenses.

In the most recent year, income taxes increased at a marginally higher rate than earnings before income taxes. This is not, however, beyond the pale.

Earnings per share are in line with operating income in terms of its growth rate.

Cash flows from operations are in line with net income, without undue influence by depreciation and amortization or deferred taxes.

Cash from investments is hovering around the zero line in the most recent year. This indicates that this category is not evidencing undue influence on bottom-line results.

The same is true of cash from financing. Cash from investing and cash from financing are important considerations when taking into account the posture of the company. Ceradyne is not a holding company, so we would not expect significant contributions from either category. Their growth is, therefore, attributable to operating results.

The contributors to free cash flow are interesting because of the significant increase during the last two years. These are a consequence of the investments made under the broad heading of capital expenditures, which began years before. In other words, the relatively recent increase in free cash flows is a consequence of capital expenditure investments from years prior. Capital expenditures have continued to grow over the last two years and represent an investment in future free cash flow growth. All of this is consistent with our earlier EPV calculations and a comparison of cash return on invested capital to weighted average cost of capital.

While the growth in total current assets is impressive, please note that this was not accomplished by overdevelopment of inventories or accounts receivable. Note, as well, the recent increase in accumulated cash — providing a significant contribution toward future growth. My assumption is that the pronounced decline in cash two years ago funded the development of the new armored vehicles initiative.

Where total current assets plateaued last year, total assets continued to rise, primarily due to added plant, property, and equipment.

Current liabilities declined (year-over-year). Please note that the company is current in its tax obligations and has no short-term debt requirements. Interestingly, its accounts payable posture has not risen appreciably in the last four years, despite significant growth.

It is important to note a recurring theme, where liabilities increased significantly in 2004. As noted previously, the company’s most significant expansion began in 2006 (two years following the 2004 results). This is important because it evidences a company that is able to plan for the future, make significant investments, and, most importantly, generate a return within a reasonable timeframe. In this case, that timeframe was two years — from significant investments in 2004 to significant increases in profitability in 2006. More recently, it is worth noting that total liabilities have not increased significantly over the last four years, in comparison to increased cash flows.

This chart (above) may well be the most important in this sequence, because it recognizes the balance sheet requirement that liabilities and stockholders equity, combined, equal net assets. The reason this chart is so important (indeed, remarkable) is that it shows the relationship between total liabilities, which has flatlined, in comparison to shareholders equity, which continues to rise dramatically. This is, therefore, a company that is producing tangible results for its equity owners.

This glowing conclusion may be attributed to a giddy investor — one who is simply delighted with his discovery. Let us, therefore, look at this investment from the standpoint of common ratio analysis, starting with return on invested capital.

The father of fundamental analysis, Benjamin Graham, maintain that a return on invested capital should fall somewhere between 6% and 10% — with an expectation that suspect companies would post results marginally in excess of 10%. Ceradyne, however, has generated results significantly in excess of that 10% threshold over the last three years.

Next, we turn to “owner’s earnings” — which Warren Buffett is reputed to use as a measure by which to calculate returns benefiting stockholders. This chart is the first of several that represent one of my creation — overlaying trended process control charting on top of the actual results. This allows me to identify when unexpected outcomes are, indeed, unexpected. The parallel lines above and below the trended mean of the actual results indicate 1, 2, and 3 standard deviations from the mean. Results that exceed the upper or lower “control limits” represent outliers on a par with a 100 year flood.

As indicated during our discussion of the financials, Ceradyne has been growing at an impressive rate over the past four or five years. Based on that, we turn to the year-over-year rates of growth for owner’s earnings.

Warren Buffett is reputed to prefer year-over-year owner’s earnings growth rates in excess of 15%. Last year’s results, at 17%, are marginally above this threshold. Again, it is important to keep in mind that growth attributable to armored vehicles has not yet begun to appear in the results … nor has growth attributable to solar energy products. These are pipeline items.

It is a measure of managerial efficiency to convert owner’s earnings to, both, book value and shareholders equity. The correlation between owners earnings and book value indicates managerial competence.

Indeed, book value has grown at a faster rate than owner’s earnings over the last five years.

Just as owner’s earnings should translate into book value, book value should translate into shareholders equity. Please note the similar response.

The year-over-year growth rate of shareholders equity in comparison to book value represents a source of comfort when it comes to assessing the effectiveness of the company’s executive leadership.

Here, we consider year-over-year changes in cash. The increased volatility is expected given the company’s recent growth (over the last four or five years). The use of process control charts to identify the expected range is helpful in this case. Note that the expected variance over the first five years were exceedingly narrow, while that variance has increased significantly as the company has grown in size. In other words, this is may be reasonably expected.

Value investors typically ignore earnings-per-share as a valuation metric, since this includes such non-cash items as goodwill amortization and depreciation. The market, however, continues to value this measure above all else. It is, therefore, appropriate to take this into account.

While the growth rate appears to be in line with owner’s earnings, book value, and shareholders equity, the volatility of results are marginally greater. This, of course, is to be expected, given the non-germane addition of non-Cash items.

The chart (above) is, as before, the year-over-year growth rate, as applied to earning per share. This indicates a year-over-year growth rate of just 11%, which may account for the market’s inability to appropriately value the company. This, of course, is just conjecture, but, under the efficient markets theory, such undervaluation should not occur.

Another consideration typically ignored by value investors is the volatility of the stock price — because intrinsic value is independent from the vacillations and gyrations of the market and its pricing (a concept that goes back to Benjamin Graham’s “Mr. Market”). Indeed, stock price volatility provides one explanation for why the market fails to appropriately value companies on such a reliable basis. In the absence of new information, there is no reason why the value of a company and its shares should change by as much as 50% in a given year. If it were not for this unsupported volatility, however, value investors could not benefit from the market and its psychosis.

Nevertheless, the market does consider stock price volatility, as measured by the stock’s beta. The following graph compares the company’s beta (x-axis) with its return (y-axis) and contrast this with the expected return for a similar level of volatility, given the risk-free cost of capital. Results that exceed the “Securities Market Line” are considered superior to the average stock market investment.

With a beta in excess of 3.0, Ceradyne’s stock is considered exceedingly volatile — even though the returns strongly exceed the markets expected rate.

Our last piece of business is to compare Ceradyne’s stock performance in light of this calculated intrinsic value over the past decade. As the next chart indicates, the stock price hovered around its book value during the early years, anticipated the company’s growth (overvaluing the stock) during the middle years, and, more recently, has declined in comparison to the company’s intrinsic value. Indeed, the current stock price is marginally closer to its book value than the calculation of its intrinsic value.

There are two items worth noting with this graph, in addition to the previous comments. First, intrinsic value is calculated based on two different approaches — namely, Monish Pabrai’s and Joe Ponzio’s. Providing both gives the reader the ability to identify the span of uncertainty that exists with value investing; recognizing that identifying intrinsic value is not a precise science. Second, while I can take very little credit for this graph and its design, it is dominately the work of Joe Ponzio — the CEO of Meridian Capital and the brain behind www.FWallStreet.com. You will note, as well, the opening graphs related to discounted cash flow analysis are based on Joe’s approach, as well.

In any event, based on the analysis provided here, I made my investment and arrived at the conclusion that Ceradyne’s current market value represents a significant discount to the company’s intrinsic value.


Subsequent to this posting, comments on another board suggested the need for proformas as the basis for calculating intrinsic value — taking into account a lower growth rate for the military sales component of Ceradyne’s income and growth in the solar energy component. Here are the results, which indicate a price target that is marginally above earlier estimates.


Written by rcrawford

May 13, 2008 at 11:40 am

9 Responses

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  1. To what extent do the fortunes of Ceredyne depend on the war in Irac?
    Isn’t your analysis tainted by this correlation? Given the end to this war, won’t things change significantly for their earnings?


    May 13, 2008 at 9:07 pm

  2. George,

    Thank you for the question. The military provisions its units based on a table of equipment and personnel and uses this as one measure of combat readiness. Training performance evaluations represent another measure, which is largely reliant on equipment (as well as leadership and performance assessments). Having identified the non-conventional threat of IEDs, especially in peace-keeping operations and in urban environments (as opposed to the traditional open-field maneuver environments of “Air-Land Battle” under Cold-War-era strategy), current levels and quality of support are necessary for successful maintenance of a unit’s operational standing.

    In other words, even if peace were to breakout around the world, US military units would require body armor and IED-resistant armored vehicles sufficient to achieve effectiveness in the new environment of non-conventional (asymmetric) threats.

    Gone are the days when the US believed it could down-grade operational capabilities and ramp-up when attacked. This mindset delayed out effective entry into World War II by two years (from the attack at Pearl Harbor to the first landing Africa) — where our manufacturing industry found it necessary to retool and mass produce tanks, artillery, and aircraft. More recently, we have witnessed the problems related to this same mistake following the “Peace-Dividend” draw-down of forces, following the end of the Cold War — reducing our forces in Europe from two Corps to one.

    When Iraq arrived, Defense Secretary Rumsfeld believed that superior equipment, technology, and strategy would allow us prevail with a smaller, lighter, and more agile force. He was right as far as the war was concerned but wrong when it came to the post-victory celebration and its unfortunate aftermath. Not only was under-provisioning a void that allowed the insurgency to take root, it is the cause for rapid-cycle redeployments — with many units on their fourth or fifth tours, extended deployments, etc.

    Across the board, our military units confront higher maintenance and replacement challenges related to equipment and parts. This is unlikely to change after our departure from Iraq due to the higher training requirements for conventional and asymmetric threats, peace keeping, etc. The growing roster of missions placed on the military (including domestic boarder monitoring and patrolling) has increased and is unlikely to abate after Iraq. Currently, our units are training for this treat in real time (in Iraq and Afghanistan). When Iraq ends, the locus of that training will shift to domestic- and USAREUR-based posts – especially, the National Training Center at Fort Irwin.




    May 13, 2008 at 10:09 pm

  3. Your thesis appears to be that the current revenues from armor will continue in one form or another. Since the fact remains that current and past (for the duration of your analysis) revenues are heavily dependent on the war, this thesis is speculative. You may be right, but I would be more conservative and put a valley in revenues to reflect the end of the war (at some point).


    May 14, 2008 at 6:40 pm

  4. Robert, this is super work. I hope your conclusions prove to be correct as I am long on CRDN and have been a stockholder for some 4 years. Thanks…I would love to see some of your other work…best…herb

    herb yellin

    May 14, 2008 at 7:30 pm

  5. First, Herb, thank you for the generous complement. Often, it is helpful to see the analysis of others, to confirm your own conclusions, raise issues not previously identified, and, when appropriate, to help provide courage for your convictions.

    George, thank you, again, for visiting my blog and, most especially, for providing an opposing perspective.

    Actually, it is not my thesis that the company will enjoy significant growth based on its support of military operations. Instead, it would be more accurate to say that I do not believe current production levels are likely to decline (in the aggregate). While we may see a shrinking of body armor produced, production of armored vehicles should continue to increase as non-forward-deployed units are provisioned in the future. My thesis for sustained production is, as indicated previously, that the military confronts a new environment and will find it necessary to upgrade units to meet a broader slate of missions. This was at the core of the Goldman Sachs report released yesterday.

    Anticipated future growth for the company is based on what the CEO has previously identified as the most promising sources for revenue expansion – mentioned in the original post. Perhaps the most promising is the company’s connection to solar energy, but there are other significant prospects for growth (unrelated to the military), as well.


    May 15, 2008 at 3:04 am

  6. Well, the analysis made my head hurt – reminded me of business school classes many years ago. But it was impressive. Anyone who truly believes our war with radical Islam will end in their lifetime is dreaming. If not in Iraq, then Iran. If not in Iran, then in Syria. This will be the mother of all wars…..and military hardware (until we are out of the picture) will continue to be purchased in ever increasing quantities…..


    May 17, 2008 at 9:38 pm

  7. Jay, thank you for the kind words.

    Interestingly, I read a New York Times article some time ago, concerning China’s boomer generation. The article maintained that much of China’s current growth is effectively compelled by the pending retirement of their much larger number of boomers. This made sense to me and formed a portion of a talk I gave in Lisbon last year, concerning the role of marketing in socialized medicine countries. In short, I argued that the populous applies no greater measure of government’s competence than how the country’s elected leadership treats seniors and children. Fail to provide for either, and “Throw the Bums Out” becomes the mantra.

    This gets at the justification for why government exists. Thomas Hobbs maintained that, in the absence of laws and government, life is short, brutish, and nasty … and then, presumably, you die. This is why the US Constitution avows that the role of government includes the provision of “domestic tranquility,” and it is why the current administration and congress responded as it did to the threat of terrorism following 9/11. Remove public safety from its mission statement, and government lacks its most salient raison d’etra.

    While I have met and like Jimmy Carter personally and respect his Nobel Peace Prize, his presidency was defined by a failure to support the military and national defense (the failed hostage rescue attempt). Just as Bill Clinton learned the lesson of never getting on the wrong side of “law and order” issues, his first term was undermined by Somalia and the decision not to support deployed US troops with armor and air support (C-130 Gun Ships, A-10’s, etc.).

    I may be wrong, but I doubt any of the current candidates (of either party, but the democrats, especially) will ignore this recent history. They may not expand the military, but none are foolish enough to gut it, either — as the Ceradyne shorts contend.


    May 18, 2008 at 10:22 am

  8. our Ceradyne shares were our best performing shares for years until last year. The company still shows up on our value screens but by no means is it a last puff of the cigar stock. I used to look for companies I thought that a technology giant like General Electric would be interested in buying out wholesale. At least that gives your investment a floor to know that even if things go wrong in the sort term that there is a well financed buyer out there just in case. That is part of the reason other nice perfroming stocks are in the portfolio. Once I found out how indispensible PCP (percision cast parts ) is to a variety of industires It made sense to own it. Ceradyne is proving to be a rare wonder stock. I recently wanted to know if it is in bubble mode because of the war orders and although it’s chart is getting steep looking and makes all sorts of comparisons stocks look flat on the same chart it is nothing compared to the Intel bubble , the amgen ascent, the aol bubble, the cisco spike, For a wonderstock it lacks most of the psychopathology of a lot of the others. Some of those other spikes took those stocks up as high as 100000 % microsoft did its spike but it was nothing compared to some of the others.

    Ceradyne is not though innovating yet. Everything they have done for the military has yet to be adapted to civilian use. Lightweight ceradyne materials can be used to improve safety ratings of the ultra lightweight fuel economy cars that are coming. Its products are finding there way into oil drill bits and that is one reason steel prices are flaming at the moment. It does take steel to explore for oil , process and distribute it and that is not to mention its transportation. The steel spike looks like a disaster waiting to happen but after comparing a spike return of 400% to something like the intel or cisco spikes I would not be so sure it is illogical yet. Andrew Carnegie picked a great moment to sell out of US Steel as it has not always been so pretty for the industry.

    I have been making comparisons of the spikes and have learned something interesting. I have ridden up more than a few and come down with some too in my few years of investing. I had no trouble discerning a year ago that the Chinese Market was going to crash. Even if there were underlying intrinsic values to justify the rise there it just looked like an accident ready to happen and now it has but it has only fallen about 40-50 percent so far. It is not done correcting yet. I fear coming wall street investment bank fall out in the next few reporting periods because some of them thought that china was the dragon amusement park ride. Ceradyne has a justify price maybe twice what it is now. I did the research and even bought more of it.

    Oh. the spike charts. then tend to take 5 years to build up to their zenith and collapse. Even the 1929 collapse and the nasdaq internet bubble follow the same pattern. so does the intel spike, the aol spike , the first amgen spike, and others. the chinese market followed the same pattern . the one chart that did not fit as well the pattern is the , if i remember correctly, is the 2 year southseas bubble spike and collapse. I am pretty certain that Ceradyne has the underlying intrinsic value to keep it on some profitable trend line that will surpass its last market highs in some period of time. If the speculators load on to it and we see a super tall spike that is an immediate signal of danger. With my logic of what the big well fiannced super corporations would buy I have had a constant string of buy outs that proved profitable and viable over time. we once owned a lot of worthington foods before kellogs bought it out. The moment i put our money into it I saw that it had a floor under it. I did not predict kellogs however. Today I am buying Philip Morris spin offs. Both of them, kraft and Philip Moris international. Both are companies a lot of competitors whould love to get their hands on. Nestle will ahve the cash to buy something in their normal industries once they sell their eye care biz. I don’t know but If I were them I would be eyeing kraft and cadbury and dr peper. kraft has the best valuation at the moment for a take over probably. Philip Moris international is the kind of company a soverign fund should want to buy. Hey if you as a government can tax a pack of ciggarette at the ratio of the tax being 4 times as high as the wholesale price than you migaht say why bother owning the cigarette company? That is easy easy money for the pirating governments but it is not to say that cigarette companies do not remain immensely profitable never the less. Canada would be wise not to start a national soverign fund. The USA has been wise not to have one. The bush social security plan that failed almost gave us one in disguise . Unless deemed to be politically incorrect to own a cig manufacturer, the governments might find cigarette manufacturing ownership even more profitable. Because government outlives everyone with the power of taxation it has it has ultimate ownership of just about everytihng as the taxes compound across several generations. If you think mutual funds are bad taking over 1 % a year off the top of their fund assets regardless of how well they perform, the US gov get double diget tax rates on all many a variety of things including income, cap gains, inheritance taxes, pension fund distributions you name it. It is the biggest money machine in world history. The only reason so called supply side economics really does work such that lower taxes produce higher revenues to the government is because time is on the government’s side. China discovered it had no tax bases unless it had free raw capitalism to produce furtunes to be able to tax. If a government taxes away capital from private enterprise in the short term it reduces future income gains that can also be taxed. As i say laffer deserves the nobel prize in economics because it does come down to life spans. The life span of the goverment is very long and individuals and their tax years, are very short. (therefore buying kraft or PM with the likelyhood they may end up being bought up by some other large company makes it dangerous to own in your more immediate taxible accounts.) government will be very sorry it supported national heath care research if it results in anything close to immortality for taxpayers. That is one more reason private funding of heath care research should be encouraged.


    June 16, 2008 at 3:51 pm

  9. […] than a value play. The case supporting that conclusion can be found in my earlier blog entry at https://rcrawford.wordpress.com/ceradyne-inc-crdn/. Since purchasing the stock, share prices have increased in value by more than […]

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