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We recently upgraded our recommendation on Universal Technical Institute Inc. (UTI) to Neutral with a price target of $13.00 following the initiatives taken by the company to offset the softness seen in student enrollments. Earlier, we had an Underperform rating on the stock.

Universal Technical also stated that the rate of fall in new student starts has decelerated in the fourth quarter of 2011. Student starts for the quarter fell 14.5%, following a decline of 32.5% witnessed in the third quarter. Management hinted that applications and new student starts will drop but at a slower rate in the beginning of fiscal 2012, and will show improvement in the second half of the year.

However, management cautioned that average number of students for fiscal 2012 will drop at a low-teens rate, and will consequently result in a mid to high single-digit revenue decline. We observe that after dropping 3.8% in the third quarter of 2011, average undergraduate full-time student enrollment fell 11.3% in the fourth quarter.

Falling enrollments is weighing upon the company’s results. Universal Technical posted lower-than-expected fourth-quarter 2011 results. The quarterly earnings of 24 cents a share missed the Zacks Consensus Estimate of 28 cents, and dropped 17.2% from 29 cents earned in the prior-year quarter due to a fall in students’ enrollment.

To counter the sluggishness witnessed in student enrollment amid turbulent environment and regulatory issues, the company is pushing hard to manage costs effectively, trying every means to improve marketing efficiencies and is launching a new program focused on automotive and diesel.

The company further intends to bring its current and potential students under the proprietary loan program by increasing its accessibility, and enhance the count of need-based scholarships in fiscal 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 provide the company a competitive advantage. However, management hinted that the regulation proposed by the Department of Education is weighing upon student enrollments.

The Department of Education proposed that an educational program could only qualify for Title IV funds, 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 federal student financial aid programs, the Title IV programs. The education institutions are also under the scanner due to the rise in the default rate of student loans.

The above analysis supports our Neutral stance on the stock. However, Universal Technical, which competes with Corinthian Colleges Inc. (COCO), holds a Zacks #5 Rank that translates into a short-term Sell recommendation, and typifies the waning economy, tough regulatory environment and falling enrollment that are adversely impacting the top and bottom line results.

 
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