Tuesday, KeyBanc Capital Markets raised the price target for Universal Stainless & Alloy (NASDAQ: USAP) shares to $36.00, up from the previous $30.00, while maintaining an Overweight rating.
The firm's analyst cites an improvement in gross margins, particularly due to a stronger mix and pricing, with over 75% of sales going to the aerospace sector.
The analyst projects a second quarter 2024 earnings per share (EPS) of $0.52, an increase from the earlier estimate of $0.42. For the full year 2024, the EPS forecast has been revised upward to $2.20 from $1.83, and for 2025, to $2.85 from $2.43.
These adjustments reflect the company's potential for aggressive deleveraging and an estimated free cash flow equity (FCFE) yield of around 10% for the average of 2024 and 2025, supporting the new price target.
Universal Stainless & Alloy is expected to gain attention from small and micro-cap investors, especially in the context of the pending acquisition of Haynes International (NASDAQ:HAYN). The company's efforts to ramp up production levels have been bolstered by the resolution of internal labor issues, which were previously a bottleneck.
The analyst also highlighted the sensitivity of the company's financials to gross margin improvements, stating that each 100 basis point increase in gross margin could translate to more than $3 million in annualized EBITDA and an additional $0.25 to $0.30 in annual EPS.
With lead times for orders extending beyond a year, Universal Stainless & Alloy is positioned to meet a wide range of customer needs as a swing provider for service centers and forgers.
Finally, the firm notes that Universal Stainless & Alloy's portfolio has a more aggressive transactional bias, as opposed to long-term contracts, which places the company in a favorable position to capitalize on the inherent tightness and spot pricing leverage in its core markets.
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