Seeking Alpha: Universal Stainless & Alloy Products Stuck Between The Hammer And The Anvil

Credit where due to fellow Seeking Alpha contributor Doyle Publishing; it has been consistently more pessimistic about Universal Stainless & Alloy Products (NASDAQ:USAP) than I have been, and that has definitely been the right call. USAP has been hurt by the same weakness in the energy end markets and inventory destocking in aerospace that has hurt Carpenter Technology (NYSE:CRS), and the company has also been hit harder by a mismatch between sales surcharges and material costs and a slower rate of progress in adding high-value VIM-remelt products to the sales mix.

Has USAP seen the point of maximum pain? Commercial aerospace orders are supposed to pick up as 2016 goes on and the destocking process should be close to the end, but "supposed to" and "should" are dangerous words to invest by. It's likewise dangerous to stake a lot on commodity price expectations - nickel prices may stabilize now that some capacity is being curtailed, but around two-thirds of the industry is still apparently willing to produce at a loss.

The problem with modeling is that you can model whatever scenario you like, but reality can be far, far different. I can model over $20 million in EBITDA for 2016 on mid-single-digit revenue growth and a low-teens gross margin, but Boeing (NYSE:BA) could cut delivery expectations further, suppliers could opt to go with bare-bones inventory levels, and commodity prices could further compromise the business. I'm not expecting the fourth quarter's low-single-digit adjusted gross margin to persist, but if it does, the questions around USAP could quickly shift to whether it stays solvent long enough to see whatever recovery there will be in aviation and energy.

Read the full article here:
Universal Stainless & Alloy Products Stuck Between The Hammer And The Anvil