Mixed 2Q at Universal Technical - Analyst Blog


Universal Technical Institute Inc. ( UTI ) reported earnings of 8 cents per share in the second quarter of 2012, lower than 28 cents per share posted in the prior-year quarter. Quarterly earnings were also below the Zacks Consensus Estimate of 10 cents. Once again, lower student enrollments and compressed margins led to the earnings miss in the quarter.

Net revenue for the quarter declined 6.9% to $106.2 million from the prior-year quarter, due to a decline in average student enrollment. Revenues, however, topped the Zacks Consensus Estimate of $104 million.

Quarter in Detail

The educational institute, which provides professional automotive, diesel, collision repair, motorcycle and marine programs, reported that average undergraduate full-time enrollment dropped 11.2% to 16,700 in the second quarter of 2012, falling consistently since the last few quarters.

Student starts, also referred to as "new student growth," declined 5.6% year over year to 3,400. Management had forewarned of weak second quarter starts expecting it to decline in the high-single-digit to low-double-digit range.

The decline in enrollment is the result of macroeconomic headwinds and continued challenges in obtaining student financing. Universal Technical derives a significant portion of its revenues from federal student financial aid programs, referred to as Title IV programs, which are administered by the Department of Education. Educational institutions are increasingly under review due to the rise in abuse of Title IV funds.

The Department of Education has 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. Educational institutions are now being asked to submit information relating to recruitment procedures and the use of student grants. Changing regulatory requirements are taking a beating on enrollment growth for most education companies.

Recently, another provider of post-secondary degree programs, ITT Educational Services Inc. ( ESI ) announced a 15.4% decline in total enrollment in the first quarter 2012 which resulted in a top-line decline of 10.8%. DeVry Inc. ( DV ) also reported a 3.9% decline in revenues due to a 3.7% reduction in total post-secondary enrollments across all its programs.

Last month, Apollo Group Inc. ( APOL ) reported a 12.2% decline in total second-quarter enrollments at the University of Phoenix, the company's wholly owned subsidiary, which pulled down its total revenues by 7.5%.

Average revenue per student at Universal Technical inched up 4.7% to approximately $6,300 as the decline in student enrollment was offset by an extra earning day and increased tuition fees in the quarter. The company reported a 2% year-over-year fall in the number of student applications received, which, however, reflected a significant improvement from a decline of 4% in the first quarter of 2012 and 8% experienced in the fourth quarter of 2011.

The number of military applications surged 19%. The number of high school applications was flat, whereas adult applications fell 6%. The graduate employment rate was consistent with last year.

Universal Technical informed that EBITDA in the quarter tumbled 94.7% to $9.4 million. Operating income plunged to $2.9 million from $11.4 million in the year-ago period, whereas operating margin shriveled 730 basis points to 2.7%. The fall in operating income was due to lower top-line growth, high fixed costs and a rise in advertising expenses.

The company is ramping up its advertising activities under brand revitalization initiatives. Advertising expense climbed 33.5% to $11.7 million in the quarter, and now represents 11% of total revenue, up from 7.7% in the second quarter of fiscal 2011. Management expects advertising expense to range between 10%-11% of total revenue for fiscal 2012.

2012 Outlook

Management did not make any major changes to its fiscal 2012 outlook provided in the prior quarter. The rate of decline in applications and new student starts improved in both the quarters of the first half of 2012. Thus the company expects new student starts to improve in the second half of the year with starts in the third quarter being lower than those in the fourth quarter.

Management, however, continues to warn that the average number of students for fiscal 2012 will drop at a low-teens rate than 2011 levels, and will consequently result in a mid-to-high single-digit revenue decline. Subsequently, operating margin and net income are also expected to be down in fiscal 2012 from 2011 levels.

Moreover, the company expects net income in the third quarter to be lower than the second (due to seasonality) and thereafter improve in the fourth quarter.

The company is pushing hard to manage costs effectively, amidst macro weakness and regulatory pressures, to counter the sluggish student enrollment environment. It is also honing its marketing efficiency and launching new curriculum.

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 with a competitive advantage.

Universal Technical further intends to make its loan programs more accessible to students and enhance the count of need-based scholarships in fiscal 2012.

Other Financial Details

Universal Technical boasted of a debt-free balance sheet, and ended the quarter with cash and cash equivalents of $116.9 million versus $51.1 million at the end of the first quarter of 2012.

The company generated operating cash flow of $10.0 million during the quarter versus $5.6 million in the sequentially prior quarter. In the quarter, the company repurchased 0.125 million shares for a total cost of approximately $1.6 million.

Our Recommendation

We currently have a Neutral recommendation on Universal Technical Institute. The stock carries a Zacks #4 Rank in the near term (Sell rating).

APOLLO GROUP (APOL): Free Stock Analysis Report
DEVRY INC (DV): Free Stock Analysis Report

ITT EDUCATIONAL (ESI): Free Stock Analysis Report
UNIVL TECH INST (UTI): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: APOL , DV , ESI , UTI



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