UTI Q2 Loss Widens; Beats Revs as Starts Improve - Analyst Blog

Universal Technical Institute, Inc.'s UTI second-quarter fiscal 2014 adjusted loss of 6 cents per share was wider than the Zacks Consensus Estimate of a loss of 1 cent as well as the year-ago loss of 4 cents.

Higher interest expenses and lower income tax benefits than last year offset relatively better starts (new student enrollments) and narrower operating loss this quarter.

Net revenue of $94.7 million declined 0.4% from the prior-year quarter due to a decline in enrollments. However, revenues beat the Zacks Consensus Estimate of $93 million by 1.8% which we believe was due to meaningful growth in starts during the quarter.

Quarter in Detail

The mechanical training institute reported 2.0% decline in average undergraduate full-time enrollment to 14,700 in the second quarter. However, revenue per student improved in the quarter.

As expected, student starts improved 6.9% to 3,100 in the quarter better than the decline seen last quarter. Management expected starts to improve in a high single-digit rate in the quarter.

Universal Technical'senrollments have been trending down consistently 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.

In order to drive new student growth, Universal Technical is making several marketing/advertising investments and offering scholarships to improve the value proposition and affordability of its programs. The companyis improving its marketing efficiency by generating higher-quality inquiries using new media-mix model. The education company is also developing new marketing materials designed to help potential students and their families understand the true cost and value of a UTI education.

The significant start growth this quarter suggests that management's efforts might be paying off.

Operating loss of $1.5 million in the quarter was narrower than a loss of $1.9 million in the prior-year quarter. Solid cost control and increased revenue per student led to lower loss in the quarter.

Fiscal 2014 Outlook

Management expects starts to decline slightly in the second half from year-ago level due to difficult economic conditions and affordability concerns. Previously, at the first-quarter conference call, management announced that it was expecting starts to grow in a low single-digit rate over the remaining nine months of the fiscal year.

Management expects the fourth quarter to be stronger than the third. In the third quarter, earnings are expected to be close to breakeven which, combined with stronger earnings show in the fourth quarter, are expected to result in significantly better operating results in 2014 than last year.

Other Stocks to Consider

Universal Technical carries a Zacks Rank #3 (Hold). Other better-ranked stocks in the education industry include DeVry Education Group, Inc. DV, TAL Education Group XRS and K12, Inc. LRN. All these stocks have a Zacks Rank #2 (Buy).