2023-11-24 07:14:02 ET
Summary
- UTI is capturing strong demand for its trade schools and vocational education programs.
- The company's 2023 results exceeded expectations while management is guiding for accelerating earnings going forward.
- We are bullish on UTI which is supported by solid fundamentals and a positive long-term outlook.
Universal Technical Institute, Inc. ( UTI ) operates a network of 33 campuses serving more than 22k workplace education students. Long recognized for programs covering skilled trades like automotive maintenance, the company's 2022 acquisition of "Concorde Career Colleges" represented an expansion into medical fields like nursing, and dental assistance.
These areas of adult education have been in demand with a positive long-term outlook. Indeed, the company reported its latest quarterly results highlighted by strong growth while guiding for record earnings into 2024.
In our view, UTI is well-positioned to consolidate its market leadership. While shares have already been a big winner over the past year, we believe there is room for more upside going forward.
UTI FY 2023 Recap
UTI reported fiscal Q4 EPS of $0.10 , up compared to $0.03 in the period last year. Revenue of $170 million climbed by 54% year-over-year, although the bulk of this increase reflected the contribution from the Concorde acquisition. The stand-alone UTI segment growth was closer to a 5% y/y increase.
The bigger story here is the earnings momentum as operating income reached $10.3 million compared to $3.5 million in Q4 2022. The more normalized adjusted EBITDA of $19.2 million, was up 27% y/y and reached $64.2 million for the full year 2023.
The balance sheet is also a strong point. UTI ended the year with $157 million in cash against $160 million in long-term debt. Overall, the company surpassed expectations established earlier in the year and is entering 2024 on a high note.
Operationally, the number of " new student starts " in 2023 is a key operating metric at 22,613, up from 13,374 in 2022, with UTI seeing a 6% increase. Notably, that pace accelerated in Q4 to 9% with management citing the opening of campuses in Texas, and Florida driving new enrollment.
A big theme for the company during the earnings conference call is the launch of new programs, essentially expanding its market opportunity with 14 new career track training solutions.
From the traditional strong point of auto-technical schooling, UTI is moving forward in areas like aviation and energy by securing the necessary regulatory licenses. With Concorde, the company is adding a specialized Diagnostic Medical Sonography program and another Cardiovascular Sonography program.
These efforts support the strong guidance for 2024 where management is targeting full-year revenue of around $710 million, representing a 17% increase y/y between organic growth and the program expansions. The expectation is that all programs can bring in 24.5k to 25.5k new student starts as the growth driver.
The metric that stands out is the forecast for adjusted EBITDA to approach $100 million in 2024, benefiting from the larger scale and operating leverage. UTI expects 2024 EPS between $0.53 and $0.58.
What's Next For UTI?
There's a lot to like about UTI as a differentiated name among private education service providers. The understanding is that a skills gap in the U.S. economy has become apparent in recent years since the pandemic, which highlighted a shortage of qualified workers in the programs UTI offers.
While much of the economy has turned to tech, the demand for areas of skilled trades, transportation, and healthcare continues to climb. Naturally, UTI benefits from its brand recognition and established relationships with major companies recruiting new graduates.
The setup here is for a long runway for steady growth that should be positive for UTI earnings. Within its strategy, the company sees opportunities to continue expanding through new campuses and launching new programs.
In terms of valuation, UTI is trading at a 21x forward P/E multiple or just 7x the 2024 adjusted EBITDA management guidance of around $100 million against the current enterprise value of $665 million. We believe these levels are reasonable for a segment leader with solid fundamentals.
On this point, UTI appears to trade at a discount to what we believe is its closest competitor in Lincoln Educational Services Corporation ( LINC ) priced at a 9x EV to forward EBITDA multiple. In this case, LINC has an overlap in terms of skilled trade programs but also has a more extensive offering covering areas like culinary, cosmetology, and even IT training.
While there are key differences between these two companies, we'd argue that UTI has stronger operating and financial momentum right now following its acquisition of Concorde. In our view, UTI is simply undervalued with room to at least converge towards LINC as an industry peer.
Final Thoughts
We rate UTI as a buy with a price target for the year ahead at $15.00 representing an 8x multiple on management's 2024 adjusted EBITDA guidance against an implied enterprise fair value of $775 million.
The bullish case here considers that UTI should benefit from what has been resilient economic conditions, with climbing demand for vocational training. The potential that the company continues to exceed expectations should justify a higher valuation premium.
At the same time, the main risk to consider would be a more concerning deterioration of the economy. The understanding is that for-profit education centers have a cyclical component that would be pressured by lower consumer discretionary spending in a recessionary environment.
Monitoring points here over the next few quarters include the student starts operating metric as well as cash flow trends. Overall, UTI is a high-quality small cap in a market segment we expect to perform well.
For further details see:
Universal Technical Institute: Strong Outlook For Trades School Leader