Seeking Alpha: Universal Stainless & Alloy Products Reduced To Slag By Weak Margins

This has been a bad year for many specialty alloy companies, but my February call on Universal Stainless & Alloy Products (NASDAQ:USAP) was especially bad. The shares of this specialty steel company have fallen almost 50% from February of this year, outpacing the steep declines at Allegheny Technologies (NYSE:ATI) and Outokumpu, as weak volumes and an imbalance between surcharges and inventory costs have undermined performance.

The sharp fall in nickel prices (the iPath Bloomberg Nickel ETN (NYSEARCA:JJN) is down about 40% over the same period) has undermined USAP's performance and I definitely underestimated the extent to which ongoing economic issues in China, Brazil, and other countries were going to pressure base metal prices this year. There is still a valid argument that USAP can expect stronger revenue growth and margins in the coming years from the aerospace cycle and a shift to higher-value alloys, but the company's erratic FCF generation and returns on capital, coupled with the competitive nature of the specialty steel industry and the cyclicality of its end markets, make that a speculative call at best.

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Universal Stainless & Alloy Products Reduced To Slag By Weak Margins