Small-Cap Ceradyne Finds Niche in Equipping Troops.

IN the past few weeks, Americans have been treated to images of U.S. military special forces, armed with night scopes, geopositioning devices and bullet-stopping vests, en route to action in Afghanistan.

As it turns out, some of the special operations equipment is made in Southern California, including the bullet-resistant vests that are manufactured in Costa Mesa by Ceradyne Inc.

What's more, the Defense Department is seeking bids from manufacturers, including Ceradyne, for a lighter vest to be worn by U.S. infantry troops - meaning a much larger number of bodies that need protecting than in the elite special troops. Additionally, the military is exploring or actually using the ceramic bullet-stopping Ceradyne pads in other places, such as helicopter seat bottoms.

The upshot? Michael Crawford, an analyst with the West Los Angeles-based B. Riley & Co., thinks Ceradyne is one of the few small cap stocks that will be able to keep, moving forward in a slumping national economy.

"Ceradyne has just spent about $4 million to add manufacturing capacity to its plant in Costa Mesa, and several other plants," said Crawford. "Right now, the vests make up about 25 percent of Ceradyne revenues. Obviously, the infantry order represents a giant growth opportunity." Ceradyne will post about $50 million in sales this year.

Ceradyne stock has rallied since Sept. 11, to about $9 a share last week from $6.45. Crawford contends the stock is still cheap. "I see this company posting double-digit earnings increases even without the vest contract. If they win (part of) the vest contract, they could earn 70 cents a share next year' he said.

Ceradyne is not only a defense contractor, but a diversified manufacturer of high-strength ceramic products, itself a form of high technology that has been overlooked on Wall Street.

Yet strong ceramics are finding widening acceptance in U.S. industry, including Detroit Diesel Corp. The engine maker recently decided to source solely from Ceradyne for certain ceramic cam parts, which last longer than steel. "These are engines that are expected not to last 100,000 miles, but 500,000 or 600,000 miles," said Crawford.

But for all Ceradyne's ability to stop bullets, Wall Street considers it just a micro-cap - its total market capitalization is less than $80 million. That is not large enough to attract the attention of many mutual fund managers, who invest only in larger companies so their trades will have a lower impact on share prices.

And the big houses probably will never cover a stock like Ceradyne because it is too small to represent significant investment banking business. That tends to stifle individual investor interest. For better or worse, often retail investors like the comfort of a professionally written analyst's report and a nod from a stockbroker before investing.

Not to worry, says Crawford. Ceradyne has no debt and a healthy market niche. And at least for now, it seems, the world demands more bullet-stopping vests.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angels Business Journal. His new book is "The Pied Pipers of Wall Street: How Analysts Sell You Down the River," Published-by Bloomberg Press.