On Dec 3, we issued an updated research report on Universal Technical Institute, Inc. UTI.
On Dec 1, Universal Technical Institute reported weak fourth-quarter fiscal 2015 results wherein earnings missed estimates and the reported decline in revenues was wider than expected. Thus, fiscal 2015 ended on a dismal note for this post-secondary education company.
Fiscal fourth-quarter adjusted loss of 9 cents per share compared unfavorably with year-ago earnings of 6 cents due to softer revenues. Revenues of $90.7 million decreased 4.9% due to lower enrollment despite an increase in tuition fee. The company reported an operating loss in the quarter due to lower revenues and higher advertising expenses.
Universal Technical also lagged its target of recording positive student starts in the quarter as starts declined 6.3%. Total enrollment declined 7.9% during the quarter due to a low student population at the beginning of the quarter as well as poor student starts. Also, costs related to the opening of the Long Beach, CA campus hurt margins. In fact, the company expects this weakness to continue into fiscal 2016 as well.
Universal Technical’s enrollments have been weak for several quarters now due to macroeconomic headwinds; continued challenges in obtaining student financing; changing regulatory requirements; increased price sensitivity and affordability concerns, and increased competition. Though the employment situation has been improving recently, wages are still low. It will thus take some time for students to realize that better education and skills will improve their career in the years to come, compared to the low-skill or no-skill jobs that they are doing today.
Furthermore, Universal Technical seems to have hit a rough patch with the U.S. Attorney’s Office for the Western District of North Carolina and several law firms investigating if the company has violated federal securities laws. On Jul 24, 2015, the education company announced that it has received a subpoena from the U.S. Attorney’s Office for the Western District of North Carolina. The subpoena demanded information regarding operations of the company’s Mooresville, NC campus over the past several years. The court has also asked the company to provide documents related to its compliance with the ““90/10 rule,” as well as those related to its other programs and practices.
Despite these headwinds, the company remains optimistic and expects student starts to increase in the low single digits in fiscal 2016 on the back of increased investment.
However, we believe that the company will need more time to return to profitability and stabilize eventually. Till then, this Zacks Rank #5 (Strong Sell) company is unlikely to impress investors.
Stocks to Consider
Some better-ranked stocks in the education industry include Lincoln Educational Services Corporation LINC, New Oriental Education & Technology Group Inc. EDU and TAL Education Group XRS, each sporting a Zacks Rank #1 (Strong Buy).
(We are reissuing this article to correct a mistake. The original article, issued on Dec 4, 2015, should no longer be relied upon.)
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