We are lowering our rating on Universal Technical Institutes UTI shares to HOLD from BUY. Though labs have re-opened, student enrollment is down from the prior year. And while revenues have declined sharply, the company’s cost structure has not declined as fast. We believe that these multiples are warranted given the risks to small-cap stocks during the pandemic.
On August 6, the company reported fiscal 3Q20 results (for the period ended June 30, 2020) that included a wider-than-expected operating loss. The Street had expected a loss of $0.14 per share. Third-quarter revenue declined 31% year-over-year to $55 million. In the first nine months of the fiscal year, the company lost $0.08 per share. The company withdrew its financial guidance in 2Q due to the pandemic. It had been expecting new student start growth of 2.5-4.5%, revenue of $330-$335 million, and net income of $9.5-$14.5 million. Hands-on labs have now opened at all campuses. More than 900 students are currently on leave of absence. New student starts increased 8% sequentially in fiscal 3Q, to 1,800. UTI began distributing the financial aid to more than 10,000 students on May 27. It incurred $5.9 million of extra costs related to changes in the delivery of instruction due to COVID-19.
EARNINGS & GROWTH ANALYSIS
Third-quarter revenue declined 31% year-over-year to $55 million. Average undergraduate full-time enrollment of 9.1 million fell 8%. Expenses also declined, but more slowly than revenue. Educational services expense declined 25%, while SG&A expense was down 3%. We look for EPS to grow in FY21, but are lowering our forecast to $0.28 from $0.51 to reflect the lower EPS base in FY20.
FINANCIAL STRENGTH & DIVIDEND
For the nine-month period, operating cash flow and free cash flow were both negative.
On the fundamentals, UTI shares are trading at 20-times our FY21 EPS estimate and at a price/sales ratio of 0.6 – below the industry group averages (ETF IYK) on these metrics. We believe that these multiples are warranted given the risks to small-cap stocks during the pandemic. We may look to move UTI back to the BUY list if new student starts continue to rebound, full-time enrollment improves, or management succeeds in lowering the company’s cost structure.