Universal Technical Institute Inc. (UTI) recently posted better-than-expected first-quarter 2011 results. The quarterly earnings of 42 cents a share outdid the Zacks Consensus Estimate of 40 cents, and climbed 10.5% from 38 cents earned in the prior-year quarter.
The Zacks Consensus Estimate for the quarter was stable prior to the earnings release.
Behind the Headline
Net revenue for the quarter climbed 13.5% to $117.4 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 8.5% to 20,400 students. Student starts for the quarter fell 15.4% to 3,300.
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 is weighing upon student enrollments. Universal Technical’s new student enrollment dropped 13% during the quarter.
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 single-digit revenue growth. Following this a negative sentiment is palpable among the analysts covering the stock, and we are witnessing a fall in the Zacks Consensus Estimates.
Universal Technical informed that EBITDA for the quarter rose 17.4% to $23.3 million, whereas EBITDA margin expanded 70 basis points to 19.8%. Operating income jumped 11.9% to $16.9 million in the quarter. However, operating income margin shriveled 20 basis points to 14.3%.
Universal Technical forecast operating margin between 11% and 13% for fiscal 2011. 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 $58.5 million and shareholders’ equity of $120.3 million. The company generated operating cash flow of $11.7 million during the quarter. Return on equity for the trailing four quarters ended December 31, 2010, rose to 25.8% 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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