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On Oct 9, we maintained a Neutral recommendation on the for-profit education company, Universal Technical Institute, Inc. (UTI - Analyst Report). Though the third-quarter fiscal 2013 results and enrollment growth were better than expected, we await a more substantial improvement in the enrollment trends.

Why the Reiteration?

Universal Technical’s third-quarter fiscal 2013 earnings of 1 cent per share beat the Zacks Consensus Estimate of breakeven earnings. We believe that better-than-anticipated student starts and improved efficiencies led to the earnings beat. However, earnings declined 75% year over year due to 8.7% shortfall in revenues.

Revenues went down due to a year-over-year decline in average enrollments and new student starts. However, student starts improved from the more than 15% shortfall seen in the previous two quarters due to rising demand. Moreover, Universal Technical’s profits were also better than the past two quarters as the company gained traction with its marketing and operational efficiency initiatives.

Enrollment has been trending down consistently for this leading provider of post-secondary education over the past few quarters as a result of macroeconomic headwinds; sluggish demand due to reluctance in taking loans and continued challenges in obtaining student financing; changing regulatory requirements; increased price sensitivity and affordability concerns; and increased competition.

Though these macro challenges continue, the auto/transportation market is rebounding which, combined with the aging workforce, is increasing market demand for skilled auto technicians. Accordingly, the company witnessed improved student applications in the quarter.

The company is working toward improving its marketing efficiency by generating higher-quality inquiries using a new media-mix model. Universal Technical hopes to improve new student starts at a lower cost by simplifying work. The strategy seems to be working as student inquiries increased 8% despite the decrease in advertising expenses. The quality of inquiries and conversion rates have also improved year over year.

In addition to the marketing efforts, Universal Technical is also modifying its programs according to the needs of the employers, to provide relevant training that leads to quality student outcomes, thereby offering more value. In Jul 2013, United Technical announced plans to collaborate with General Motors Co. (GM - Analyst Report) to devise a new training program for UTI students at the Avondale campus.

In addition, Universal Technical already works closely with leading original equipment manufacturers in the automotive, diesel, motorcycle and marine industries such as, Ford Motor Co. (F - Analyst Report), Honda Motor Co., Ltd. (HMC - Analyst Report), Harley Davidson, Inc. and many more.

The new student starts are expected to show some positive growth over the next two quarters. However, we prefer to wait until the company’s efforts result in a substantial improvement in enrollment trends. Moreover, macroeconomic uncertainties and regulatory pressures remain overhangs.

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