This pandemic-driven downturn has been a brutal one for Universal Stainless & Alloy Products (USAP), and while commodity stainless steel markets have turned up on improving demand from end-markets like autos and appliances, it’s going to take a little longer for markets like aerospace and oil/gas to sort themselves out and drive USAP’s recovery.
When I last wrote about USAP, I thought the shares were undervalued below $8 to $9. Since then, the shares have risen about 25% to a little over $9, as 2020 revenue and EBITDA came in a little lower than I’d expected, FCF outperformed on a greater net working capital release, and commodity markets have rebounded sharply.
I do expect meaningful recovery growth from USAP starting late in 2021 and continuing on through 2024 on recovering aerospace and oil/gas, as well as increased premium offerings in a range of smaller markets including “general industry” categories like medical and semiconductor. With that recovery, I think the near-term fair value improves to $10-12/share, and I do see a possibility of the stock overshooting as the recovery becomes evident.
Still, I would remind investors that this is a stock that should be bought to be sold – holding over a full cycle is painful, and despite three major runs over the last 20 years (2007, 2011-12, and 2018), the annualized return over those 20 years is just 1%.
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