INVESTMENT THESIS
Universal Technical Institute (NYSE: UTI). The company reopened by adopting a blended learning approach, which combines in-person labs with virtual instruction. UTI believes that this could be a lasting change in the curriculum, as it provides students with greater flexibility while also allowing the company to double classroom enrollment. The company also plans to diversify its program offerings and expand to new campus locations. While we have a favorable view of these strategic initiatives, UTI has only recently become profitable and continues to face pressure from the pandemic.
RECENT DEVELOPMENTS
The beta on UTI is 0.91.
UTI recently reported fiscal 4Q20 results that missed analyst expectations. The company reported 4Q net revenue of $76.3 million, down 13% from the prior year, and GAAP diluted EPS of $0.09, consistent with the prior year but below the consensus estimate of $0.12. Adjusted EBITDA of $9.7 million fell 6.5%.
Adjusted free cash flow fell 79% to $4.3 million. Adjusted EBITDA of $14 million was down 17.8%.
As of 4Q20, nearly 80% of students were participating in hands-on labs, compared to 40% in 3Q. In 3Q, new student starts declined 10.3% to approximately 5,800. Approximately 900 students have taken a leave of absence.
The company is planning to diversify its program offerings and expand to a new campus. Management noted that these efforts may involve M&A. UTI may also take advantage of a favorable corporate real estate market and purchase rather than lease facilities.
Based on double-digit growth in new student enrollment at the start of fiscal 1Q21, management provided the following guidance: new student start growth of 10%-15%, revenue growth of 10%-15%, net income of $14-$19 million, and adjusted EBITDA of $30-$35 million. This guidance does not assume any additional COVID-related disruptions.
EARNINGS & GROWTH ANALYSIS
The pandemic has had a significant impact on UTI’s earnings. Total student starts were down 10.3% in fiscal 4Q while average enrollment increased by 3%, as many students moved more slowly hrough the curriculum. Fourth-quarter revenue declined 13% year-over-year to $76 million, including $6.1 million in deferred revenue related to the timing of make-up labs that were impacted by the pandemic.
For the full year, total student starts were down 3.2% and average enrollment of nearly 10,500 declined 2%. Revenue decreased 9.3% to $300.8 million due to lower enrollment and students’ slower progress through the curriculum. At the completion of the most recent course rotation, 78% of students were current with their in-person labs, up from 40% in 3Q20. The percentage of ‘all-virtual’ students also fell from 13% to 3%.
On the expense side, total operating expenses declined 14.7% and were 92% of sales, an improvement of 190 basis points. The decline reflected a reduced headcount and lower occupancy expenses. Educational services and facility costs were 49% of sales, an improvement of 100 basis points, and SG&A expenses were 43% of sales, consistent with the prior year.
Turning to our estimates, based on management’s guidance, we are maintaining our FY21 forecast of $0.28, implying growth of 11%. We are setting an FY22 EPS estimate of $0.29.
FINANCIAL STRENGTH & DIVIDEND
The company has suspended stock buybacks but is considering reinstating the program.
VALUATION
We may look to move UTI back to our BUY list if full-time enrollment improves or management succeeds in lowering the company’s cost structure.
On November 23 at midday, HOLD-rated UTI traded at $6.14, up $0.03.
Source: Argus
