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Universal Technical on a Tightrope

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

Universal Technical’s third quarter 2012 earnings of 4 cents per share came in line with the Zacks Consensus Estimate. However, quarterly earnings declined sharply from the prior-year quarter due to lower-than-expected revenue and compressed margins. Net revenue for the quarter declined 8.6% to $99.6 million due to lower student population and flat student starts. Universal Technical reported a 10.8% fall in average undergraduate full-time enrollment to 15,300 in the third quarter of 2012.

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 and other) 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.

Universal Technical is pushing hard to manage costs effectively, amidst macroeconomic 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 Internet) to the non-aggregator channels (like television), which are generating higher student enquiries though they are expensive. Universal Technical further intends to make its loan programs more accessible to students and also ease some eligibility restrictions. The company has also increased the count of need-based scholarships to attract new students. Though average enrollments are declining, the company has seen sequential improvements in the new student starts in all the three quarters of 2012 due to these efforts.

At the end, we remain cautious about the declining student enrollments due to widespread unemployment, a prevailing sluggish economy, and difficulties 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.

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