Universal Technical Misses - Analyst Blog

Universal Technical Institute Inc. (UTI) recently posted lower-than-expected fourth-quarter 2010 results. The quarterly earnings of 29 cents a share missed the Zacks Consensus Estimate of 39 cents, and dropped 9.4% from 32 cents earned in the prior-year quarter due to increased operating expenses.

Following this, a negative sentiment may be palpable among the analysts covering the stock, and we could witness a fall in the Zacks Consensus Estimate in the coming days.

The Zacks Consensus Estimate for the quarter was stable prior to the earnings announcement. Universal Technical's quarterly earnings underperformed the Zacks Consensus Estimate by 25.6%. However, in the four preceding quarters the company had a positive earnings surprise history, which oscillated between 4.2% and 68.4%, with the four-quarter average being 39%.

Behind the Headlines

Net revenue for the quarter climbed to $119.2 million, up 19.8% from the prior-year quarter, and also came ahead of the Zacks Consensus Revenue Estimate of $115 million. The increase in revenue reflects higher average undergraduate full-time student enrollment and rise in tuition fees.

The educational institute, which provides professional automotive, diesel, collision repair, motorcycle and marine programs, reported that average undergraduate full-time student enrollment surged 15.4% to 19,500 students. Student starts for the quarter fell 5% to 7,600. 

Universal Technical's leading position in providing technical education to aspiring automotive professionals and its business model of working closely with leading original equipment manufacturers provide the company a competitive advantage. The company's sustained effort to expand educational programs helps it to boost enrollments, and in turn, the top-line.

However, management hinted that the regulation proposed by the Department of Education may moderate the growth of new students and average enrollments.

Recently, the Department of Education proposed that an educational program could only qualify for Title IV funds, if it helps in achieving gainful employment, which includes the criteria of loan repayment rate and debt-to-income ratios. The company derives a major portion of its revenues from federal student financial aid programs, the Title IV programs. The education institutions are also under the scanner due to the rise in the default rate of student loans.

The sector bellwether Apollo Group Inc. (APOL) has also cautioned that enrollment in its first-quarter 2011 would drop by more than 40%, and withdrew its outlook for the fiscal year, citing an uncertain regulatory environment. 

Universal Technical informed that EBITDA for the quarter rose 6.7% to $18.4 million, whereas EBITDA margin contracted 190 basis points to 15.5%. Operating income tumbled 4.4% to $11.8 million in the quarter, whereas the operating income margin shriveled 240 basis points to 9.9%. The fall in operating income was due to a 23.2% rise in operating expenses.

Other Financial Details

Universal Technical ended the quarter with cash and cash equivalents of $49 million and shareholders' equity of $108.4 million. Operating cash flow for fiscal 2010 was $67.5 million. Return on equity for the trailing four quarters ended September 30, 2010 rose to 25.6% from 11.3% for the trailing four quarters ended September 30, 2009.

Management Guidance

For fiscal 2011, management now expects growth in mid single-digits for student applications and low single-digits for student starts, leading to mid single-digits growth in the average number of students. Universal Technical forecasted low double-digit growth in revenues, operating margins between 11% and 13% and earnings per share to rise in the range of 15% to 20%. The given outlook did not take into account any impact from the new regulations proposed by the Department of Education.

Universal Technical maintains a Zacks #4 Rank, which translates into a short-term ‘Sell' recommendation. However, we have a long-term Neutral rating on the stock.

 
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