Universal Stainless: A knight in stainless steel
America’s “Rust Belt” doesn’t look quite so decrepit around the mills of Universal Stainless & Alloy (Nasdaq:USAP), a Pennsylvania steel company that has managed to retain its sheen despite the withering U.S. economy.
The specialty steelmaker found its niche making products such as landing gear components and airfoils for the aerospace industry, turbine blades for power generation systems, corrosion-resistant products for petrochemical plants, and tool-and-die industry parts. More than half of Universal’s output is stainless, but its semi-finished and finished specialty products also include tool and alloyed steels.
Of the analysts following Universal Stainless & Alloy, Thomson Reuters found that two of four rate the stock at “hold,” with another calling it a “buy” and one placing it at “strong buy.”
Reflecting this split decision leaning to the positive side, shares of Universal Stainless are about where they started the year, having opened at $35.62 before sinking to a 52-week low of $23.14 on Jan. 23. Universal reached its 52-week high of $42.66 last July 16. At Thomson, the median price target is $41.
Universal traded at historical highs above $50 in early 2007, before helter-skelter nickel prices and the faltering economy sent shares lower. Most recently, Universal Stainless closed Wednesday at $34.50.
In pursuing aerospace business, Universal Stainless does face some headwinds, such as aircraft orders being put off or delays in 787 Dreamliner development by Boeing Co. (NYSE:BA). While much of that next-generation plane is made of composite materials, it’ll need plenty of specialty metal parts. Universal President and CEO Dennis Oates said on an April 24 conference call with analysts that the impact from 787 delays would be “small,” noting that the planes are still being built.
To counter a soft U.S. economy, Universal Stainless has turned its attention to increased international demand, sending more steel to Europe and China. Universal recently announced a $3.7 million European order for power generation parts, and on the April call, Oates mentioned interest from India.
Universal Stainless was founded in 1994 by Clarence “Mac” McAninch and other ex-managers of what was an Armco Stainless plant in Bridgeville, a borough southwest of Pittsburgh. Months after bringing the troubled plant back to life, Universal Stainless went public, then sold additional shares in 1995 to help finance growth.
McAninch remains board chairman, having turned over the reins to industry veteran Oates in January. The company’s strategy mimics that of industrialists such as Wilbur Ross: a calculated acquisition of distressed operations, making them profitable and using them as a springboard for growth.
In 1995, Universal bought a Titusville, Pa., plant that introduced it to the aerospace and power generation markets. Then in 2002, the company acquired the bankrupt Empire Specialty Steel plant in Dunkirk, N.Y., doubling annual sales, but requiring hefty investments.
For the three months ended March 31, Universal Stainless reported flat sales of $56.8 million, while net income fell to $4.7 million, or $0.70 per share, compared with $6.8 million, or $1 a share, in the first quarter of 2007. Results exceeded company and analysts’ expectations, and its order backlog grew to $88 million from $85 million in December.
Universal Stainless issued guidance for the just-completed second quarter calling for sales of $55 to $60 million and earnings per share of $0.70 to $0.75 — compared with sales of $62.1 million and $0.87 EPS in 2007’s second quarter, numbers inflated by rising nickel prices.
For all of 2007, sales increased 12.8% to a record $229.9 million. Net income rose to a record $22.5 million, from $20.6 million for all of 2006, with earnings per share growing to $3.32 from $3.11 the year before. Universal noted in its 2007 annual report that its three biggest customers accounted for 38% of total sales.
Universal Stainless hit bottom in 2003, posting a net loss of $1.4 million, but the bottom line has steadily improved since then. There’s a potential for production disruptions, since a six-year contract with the United Steel Workers covering 246 Bridgeville employees expires in August.
For American steelmakers, the never-ending story is the struggle with rising costs — mostly raw materials and energy — fluctuating demand and contentious trade practices from foreign competition. The current economic downturn, and historically high commodities and energy prices, are impacting U.S. steelmakers.
To offset its rising prices, Universal Stainless implemented several price increases in the quarter, most recently a second 5% to 7% boost for tool steel, effective Tuesday.
In a June 9 update on the stainless steel market, Davenport & Co. analysts Lloyd O’Carroll and Timothy Hayes said they’re not expecting a dropoff in production volume in the second half of 2008, despite falling nickel prices. Davenport rates Universal Stainless a “buy,” with a price target of $44. The analysts raised their target from $39 following release of first-quarter results, writing in an April 24 note that “long-term sales growth is compelling,” because of Universal’s end markets that promise “good long-term growth prospects.” And, they pointed out, other than aerospace, the near-term prospects of Universal’s other customers are strong.
Having carved out a target for its products, Universal Stainless could bring investors some solid-as-steel rewards.
