Universal Tech Institute at Neutral

We have maintained a Neutral recommendation on Universal Technical Institute, Inc. ( UTI - Analyst Report ) following an appraisal of second quarter of fiscal 2012 results.

Universal Technical reported earnings of 8 cents per share in the second quarter of 2012, lower than 28 cents posted in the prior-year quarter. Quarterly earnings were also below the Zacks Consensus Estimate of 10 cents.

Once again lower student enrollment and compressed margins led to the earnings miss in the quarter. Net revenue for the quarter declined 6.9% due to a fall of 11.2% in average student enrollment.

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 (OEM) and other industry relationships (after-market retailers, fleet service providers etc.) provide the company a competitive advantage. The company regularly updates and expands the content of its existing programs as well as develops new programs in order to make its students appropriately skilled to keep up with technological advancements.

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

In 2011, the company began adjustments to its marketing strategies to generate higher quality student inquiry sources. It has shifted from lead aggregator marketing channels (like the Internet) to the non-aggregator channels (like television), which are generating higher student enquiries though they are more costly.

Universal Technical also intends to make its loan programs more accessible to students and enhance the count of need-based scholarships in fiscal 2012 to attract new students. Despite a slowdown in average enrollment, the company saw improvements in the number of student applications and new student starts in the first half of 2012 due to these efforts. New student starts are expected to improve further in the second half of the year and management is hopeful that they will turn positive in the fourth quarter.

We remain cautious of declining student enrollment due to widespread unemployment, a still sluggish economy and struggles in obtaining student financing under a difficult regulatory environment. We thus prefer to remain on the sidelines until we see substantial enrollment growth and improvement in the overall industry outlook.