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Sun, Sep 16, 2007 - Page 12 News List

Armor maker's shares caught in Iraq debate

By NELSON D. SCHWARTZ  /  NY TIMES NEWS SERVICE

Workers are pictured at a Ceradyne assembly plant in Costa Mesa, California, earlier this month. The company has carved out a niche supplying the lightweight body armor that protects soldiers from threats not foreseen when the war began.

PHOTO: NY TIMES NEWS SERVICE

In every war, there are winners and losers -- military, political and, to be sure, financial. And the war in Iraq, now in its fourth year, is no different. Except one of the biggest business beneficiaries of this conflict isn't a giant military contractor or even a defense company at all.

It is a little-known maker of specialty ceramics called Ceradyne, and its shares have risen 10-fold since the start of the war.

The company has carved out a niche supplying the lightweight body armor that protects soldiers from threats not foreseen when the war began, like insurgents armed with roadside bombs and armor-piercing bullets.

Ceradyne's ceramic plates weigh less than half what conventional steel plates do, permitting better mobility. The company, which is 40 years old and based near Los Angeles, is selling 25,000 sets a month to the Pentagon.

"These guys were in the right place at the right time, and they executed very well," said Brian Butler, an analyst with Friedman, Billings, Ramsey.

Profit in the first half of this year rose more than 40 percent from the same period a year earlier. The company has told investors it expected revenue to rise to US$1 billion by 2010 from US$720 million this year.

Now, just as US policy in Iraq seems to be at a crossroads, with General David Petraeus and US President George W. Bush asking for patience last week and Democratic presidential candidates like Democratic Senator Barack Obama demanding a rapid withdrawal, Ceradyne's stock seems to be echoing the debate.

On Wall Street, opinion is deeply divided, with investors who are betting on a drop in the stock having sold short more than 10 percent of Ceradyne shares.

"What if we pull out of Iraq? That's the biggest risk," says Jason Simon of JMP Securities, a boutique investment bank in San Francisco.

Joel Moskowitz, Ceradyne's founder and chief executive, remembers the lean years of the 1990s, when Ceradyne stock hovered between US$5 and US$10 a share for most of the decade. Today, it is near US$70, but he says his company's fate doesn't turn on Washington's policy toward Iraq.

"It doesn't change anything," he says. "Body armor has changed the tactical course of war, and the Army is going to want everyone to have it."

He also points out that Ceradyne has other successful businesses -- like ceramic components that go into things as diverse as solar cells, jet engines and orthodontics -- and a longstanding technical expertise that helped it move quickly when the Pentagon suddenly needed better protection for troops under fire from the insurgency in Iraq.

"The only reason we are where we are is because of the technology we have," he says.

That may be true, but body armor now generates more than 80 percent of the company's profits.

Then there is the issue of competition -- Ceradyne's market share in body armor is roughly 80 percent -- and skeptics like Butler warn that new competitors are likely to eat into Ceradyne's dominance. That is among the reasons he has a target price of US$60 for Ceradyne, US$10 below where it is now trading.

Ceradyne's best hope may be to win a share of a contract set to be awarded next year for upgraded armor to protect against armor-piercing bullets increasingly being used by insurgents in Iraq.

That's among the reasons that Simon is bullish on Ceradyne. His target price is US$85.

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