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We recently upgraded our recommendation on Universal Technical Institute, Inc. (UTI) to Neutral with a price target of $14.00 following its third-quarter 2011 results. Earlier, we had an Underperform rating on the stock.

Universal Technical posted better-than-expected third-quarter results. The quarterly earnings of 27 cents a share topped the Zacks Consensus Estimate of 21 cents, and climbed 8% from 25 cents earned in the prior-year quarter.

Net revenue climbed 1.3% to $108.9 million from the prior-year quarter, and came in ahead of the Zacks Consensus Estimate of $105 million. The revenue upswing reflects a rise in tuition fees, partially offset by a fall in average undergraduate full-time student enrollment.

Management hinted that the regulation proposed by the Department of Education is weighing upon student enrollments. The educational institute, which provides professional automotive, diesel, collision repair, motorcycle and marine programs said that average undergraduate full-time enrollment dropped 3.8% in the third quarter, following an increase of 3.3% in the previous quarter. Student starts plummeted 32.5% to 2,700. 

The Department of Education proposed that an educational program could qualify for Title IV funds, only if it helps in achieving gainful employment, which includes the criteria of loan repayment rate and debt-to-income ratios. The company derives a major portion of its revenues from Title IV -- the federal student financial aid programs. The education institutions are also under the scanner due to the rise in the default rate of student loans.

Universal Technical warned that enrollment of new students for the fourth quarter and fiscal 2011 will be below the prior periods, and consequently result in a low single-digit revenue growth for the year.

However, the company’s debt-free balance sheet and healthy cash reserves that augur well for future operating performance are encouraging. Moreover, Universal Technical continues to forecast operating margin between 11% and 13% for fiscal 2011 based on effective cost management.

Universal Technical’s leading position in providing technical education to aspiring automotive professionals and its business strategy of working closely with leading original equipment manufacturers provide a competitive advantage.

Currently, we have a long-term Neutral rating on the stock. Moreover, Universal Technical, which competes with Corinthian Colleges Inc. (COCO), holds a Zacks #3 Rank that translates into a short-term Hold recommendation, and correlates with our long-term view. We remain concerned about current macroeconomic environment, where a fear about another possible recession is gaining ground. 

 
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