Universal Technical Institute Inc. (UTI) recently posted better-than-expected second-quarter 2011 results. The quarterly earnings of 28 cents a share outdid the Zacks Consensus Estimate of 26 cents, and climbed 12% from 25 cents earned in the prior-year quarter.

Behind the Headline

Net revenue for the quarter climbed 8.1% to $114.2 million from the prior-year quarter, and remained at par with the Zacks Consensus Estimate. The increase in revenue reflects higher average undergraduate full-time student enrollment and a rise in tuition fees.

The educational institute, which provides professional automotive, diesel, collision repair, motorcycle and marine programs, reported that average undergraduate full-time enrollment rose 3.3% to 18,800 students. However, student starts for the quarter fell 12.2% to 3,600. 

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.

However, management hinted that the regulation proposed by the Department of Education is weighing upon student enrollments.

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.

Universal Technical warned that enrollment of new students for fiscal 2011 will be below the prior-year, and consequently result in a low single-digit revenue growth.

Universal Technical informed that EBITDA for the quarter rose 21.6% to $17.9 million, whereas EBITDA margin expanded 180 basis points to 15.7%. Operating income jumped 15.2% to $11.4 million in the quarter, whereas operating margin increased 60 basis points to 10%.

Universal Technical continues to forecast operating margin between 11% and 13% for fiscal 2011 based on effective cost management. The given outlook did not take into account any impact from the new regulations proposed by the Department of Education.

Other Financial Details

Universal Technical ended the quarter with cash and cash equivalents of $52.7 million and shareholders’ equity of $129.6 million. The company generated operating cash flow of $17.1 million during the quarter. Return on equity for the trailing four quarters ended March 31, 2011, rose to 26.2% from 25.6% for the trailing four quarters ended September 30, 2010.

Currently, we have a long-term Underperform rating on the stock. Universal Technical, which competes with Corinthian Colleges Inc. (COCO), holds a Zacks #4 Rank, which translates into a short-term Sell recommendation.

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