Author Topic: USAP - Universal Stainless & Alloy Products  (Read 5113 times)

mjohn707

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Re: USAP - Universal Stainless & Alloy Products
« Reply #10 on: April 08, 2017, 11:14:29 AM »
One other thing...

Do you know how the pricing of their goods works? I mean, I know from their 10-k that they have a sales pricing surcharge mechanism which protects them from increases in RM prices...

But generally speaking, would it just be based on market price for the specialty steel? Like overall steel prices?

Are the overall steel prices would be highly correlated with their input costs? Like would we expect rising Moly, Nickel etc prices to occur in similar timing to increases in steel (and consequently selling price?)

I guess I am just trying to get at, are they really sensitive to the price of steel or is it a flow (like I indicated in my original write-up). Again, I am not 100% sure given my inexperience with the industry.

What is your take?
As far as the surcharge, it’s based off of nickel pricing primarily as per the 10-K.   Generally speaking, I’m don’t really know how pricing mechanism works in the sense of how exactly the service centers and the company (and other steel producers) negotiate the price between them, but I would suspect that fundamental dynamic is that the company is primarily a price-taker dependent on the prevailing market prices for their products at the time of sale, at least for the majority of their products.

I would also bet that the company is sensitive both to price and flow, and in scarcity industry conditions where raw materials and specialty steel prices are increasing they can take surcharges and additional margin, and in oversupply conditions where material and steel prices are moving the other way, the competitive situation is such that they can’t recover their margin.

That’s all just a best guess really though
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samaniv

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Re: USAP - Universal Stainless & Alloy Products
« Reply #11 on: April 26, 2017, 08:35:02 AM »
John,

Fairly big rally today after earnings release. Are you still a holder?

I still think it is modestly undervalued. I can't place a finger on intrinsic value but I believe it to be upwards of $20. Hard to tell.

Might lock in some capital gains and hold the remainder.


mjohn707

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Re: USAP - Universal Stainless & Alloy Products
« Reply #12 on: April 26, 2017, 09:19:26 AM »
John,

Fairly big rally today after earnings release. Are you still a holder?

I still think it is modestly undervalued. I can't place a finger on intrinsic value but I believe it to be upwards of $20. Hard to tell.

Might lock in some capital gains and hold the remainder.

Yeah I still hold my full position, book value is $25 a share or so, probably worth north of that.  I don't think it's a terrible idea to start selling a bit now though
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mjohn707

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Re: USAP - Universal Stainless & Alloy Products
« Reply #13 on: July 01, 2017, 09:06:55 AM »
Just to keep this idea updated, Synalloy (SYNL) proposed a merger transaction with USAP where USAP shareholders would have been the slight majority owner of the combined company.  The USAP board rejected the proposal on 6/28/17 and filed an 8-K with the terms of Synalloy's proposal.  I don't really have any knowledge of Synalloy's business, but the deal didn't sound that terrific to me.  I'm sure that any merger activity might have been a sort of catalyst to realize additional value out of this situation, but I think it would have also increased the degree of difficulty in monitoring this thing going forward, and I just have a distaste for stuff that is really complicated
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samaniv

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Re: USAP - Universal Stainless & Alloy Products
« Reply #14 on: July 04, 2017, 12:10:31 PM »
John,

I also don't have enough knowledge of Synalloy business to know if this was a good deal or not. It seems Synalloy was willing to go public and direct to the institutional shareholders.

"The point that I am making here is that a small group of investors controls a significant majority of USAP’s shares and polling them on their thoughts about our indication of interest of merging the two companies would be easy to facilitate. I would prefer to see us explore a possible merger in private, however I am willing to go public with our interest so that the shareholders of both companies can evaluate a merger for themselves."

Since we are directly aligned with these institutional shareholders - I am sure they will be able to make a more informed decision on this on our behalves. Either way, its good news that others also believe USAP  business to be undervalued.


nwoodman

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Re: USAP - Universal Stainless & Alloy Products
« Reply #15 on: July 27, 2017, 05:52:05 AM »
Conference Call Notes
•   Q1 price increases for stainless and low alloy have started to kick in July
•   Surcharges recovering by September not a big issue
•   5 more customer approvals – 4 Aero,  1 Energy Services
•   2 additional premium products commercialized during the quarter
•   15 products under development
•   Some expectation that anti-dumping initiatives might be invoked

Aerospace
•   Good orders for majors at Paris Airshow
•   Global traffic up 7.7% YoY
•   Building momentum in defence
•   Healthy market overall

Heavy Equipment
•   Construction equipment manufactures tightening market
•   CAT turning the corner etc

O&G
•   Demand flat in most recent quarter
•   Slow steady recovery

Power Gen
•   Market dependent on how many turbines GE choose to build in US
•   Maintenance is their focus

CC Questions
•   A modest improvement in gross margins to mid teens
•   Q3 and Q4 generally weaker quarters
•   Growth in sales expected even with lower surcharge
•   Dunkirk - $8m investment in 4th quarter (mostly 2018 investment with benefits seen in FY18 and FY19)
•   See improvement possibility in meltshop more on that later
•   IT expenditure potential to achieve tighter controls in the future
•   WIP inventory likely to come down in the next couple of quarters, the real issue is getting a higher % done the first time
•   Still in development mode for new alloys.  Carrying $6m in R&D inventory, good material and will likely be sold.  A couple years ago it was $13m
•   Electrodes there are issues with availability, pricing tight, they are covered until 2018 but  visibility not there.  Could be a hit of $500,000/p.a based on forecast pricing.  This is a minor concern but will affect everyone

What they might look like in 12-24 months time

Sales:                         $200m (30% sales growth)
Gross Margin:            15%
Gross Profit                $30
SGA                            $5m
Operating                    25
Interest & Am             $5
Pre-Tax                       $20.0
Tax                              25%
Net                              $15 (7.5%)

Shares Out                 7.3m
EPS                             $2.05
10x’s                           $21

Equity                          $183m
BVPS                          $25.1
Current Share Price      $18.33
P/B                             18.33/25.1=0.73


They have had revenue >$200m in 5 of the last 10 years, not difficult to imagine them achieving similar levels or higher in this cycle.

What they might be worth as a bolt on to Allegheny, Carpenter or a foreign player next year or the year after?
 
•   1x’s sales 200/7.3=$27/share
•   8x’s EBITDA = 23.5*8=$25.75/share
•   1x’s Book = $27

Cheers

nwoodman

« Last Edit: July 27, 2017, 06:29:43 PM by nwoodman »

mjohn707

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Re: USAP - Universal Stainless & Alloy Products
« Reply #16 on: October 13, 2017, 10:20:23 AM »
Just to update on this name, I sold half of my original position today at about $22 per share, which is a bit above a 100% return on the market price of $10.85 as of the original write up on 10/2/15
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samaniv

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Re: USAP - Universal Stainless & Alloy Products
« Reply #17 on: October 16, 2017, 01:42:40 PM »
I also sold half - 3/4 of my position around $21.50 - $22.

mjohn707

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Re: USAP - Universal Stainless & Alloy Products
« Reply #18 on: October 16, 2017, 06:28:17 PM »
When I sell shares it almost guarantees that they'll at least double pretty quickly after
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mjohn707

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Re: USAP - Universal Stainless & Alloy Products
« Reply #19 on: January 08, 2018, 11:43:57 AM »
Sold the other half of my shares today for $22, so I'm out of this completely 
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