Universal Stainless & Alloy Products (USAP), a key supplier in the aerospace industry, recently held its Q1 2024 earnings call. Amidst a sea of positive pronouncements about record sales, booming demand, and robust growth, a single, seemingly innocuous statement from CEO Chris Zimmer has sent a tremor through my analytical core. It's a tremor I suspect most others have missed, but one that could have significant implications for the rosy Boeing and Airbus production ramp-up narrative that's currently driving investor optimism.

Zimmer, when discussing the impact of Boeing's production issues on the supply chain, stated, "If we go out beyond the late June, July time period, and they [Boeing] don't have resolution with the FAA to get back on track going beyond the 38 per month rate, I think at that point, then we need to reassess what the environment looks like."

On the surface, this appears to be a mere acknowledgment of uncertainty. However, I believe it masks a deeply concerning reality: Universal Stainless may be harboring doubts about Boeing's ability to achieve its planned rate increases in 2025 and 2026.

Let's unpack this. The aerospace industry's current boom is built on the assumption that Boeing, plagued by production issues, will eventually resolve them and ramp up production to meet the surging demand for new aircraft. This expectation is so deeply ingrained that even with Boeing's build rates currently suppressed, suppliers like Universal Stainless are being told to maintain their own production pace, essentially building inventory in anticipation of future demand.

This "build now, sell later" strategy is a risky gamble, especially for a smaller player like Universal Stainless. The company has already invested heavily in expanding its premium alloy capacity, specifically to meet this anticipated demand surge. Should those rate increases fail to materialize, they'll be left holding the bag – a bag filled with expensive, specialized inventory and idle capacity.

Zimmer's statement suggests an internal timeline. Universal Stainless is comfortable with the current situation through June/July. After that, a lack of FAA resolution and rate increase confirmation from Boeing becomes a problem. This implies that beyond this self-imposed deadline, the company's financial projections – predicated on those rate increases – would be jeopardized.

This internal timeline throws a wrench into the prevailing narrative. If Universal Stainless, intimately familiar with Boeing's production capabilities and the intricate dynamics of the aerospace supply chain, is setting an internal deadline for Boeing's recovery, shouldn't investors be doing the same?

Consider this: Universal Stainless' backlog stands at a robust $325 million, a significant portion of which is tied to aerospace demand. If their projections are even slightly off, the impact on their revenue and profitability could be substantial. Their Q1 gross margin, while impressive at 18.9%, includes a $1.3 million raw material misalignment. This misalignment is expected to moderate in Q2 and disappear in the second half. However, if their volume assumptions are incorrect, that margin could face significant pressure.

Furthermore, the company is aggressively paying down debt, reducing it by $4.3 million in Q1 alone. This deleveraging effort, while laudable, further underscores the potential vulnerability should revenue projections falter.

What's particularly intriguing is that Zimmer chose to highlight this timeline on the earnings call. This wasn't a buried footnote in a dense 10-K filing; it was a deliberate statement aimed at a listening audience of analysts and investors. Is this a subtle warning, a canary in the coal mine suggesting that the much-anticipated Boeing rate increases might be more mirage than reality?

This isn't to say that Boeing won't eventually recover. But Zimmer's statement raises a crucial question: are investors, lulled by the broader narrative of aerospace market growth, adequately factoring in the risk that Boeing's recovery might be slower, more complex, and potentially more costly than anticipated?

Universal Stainless Historical Gross Margin and Revenue

The chart below shows Universal Stainless' historical gross margin and revenue, highlighting their recent growth and profitability trends. As their backlog is significantly tied to Boeing's projected rate increases, any delay could impact their future performance.

It's a question worth pondering, especially as we move closer to Universal Stainless' self-imposed July deadline. If Boeing fails to deliver concrete signals of rate increase implementation beyond 38 per month by then, I believe a reassessment of the entire aerospace sector's growth trajectory will be warranted.

And that reassessment might just reveal that the current boom is built on foundations shakier than anyone is willing to admit.

"Fun Fact: The aerospace industry relies on incredibly specialized alloys. Universal Stainless produces premium alloys that can withstand extreme temperatures and pressures, essential for components like jet engine turbine blades and landing gear."