Universal Technical Institute: Beneficial Guidance And Cheap (NYSE:UTI)

Universal Technical Institute (NYSE:UTI) recently delivered beneficial guidance for the year 2024 and noted that the addition of healthcare education could bring significant diversification. Given the market expectations about the healthcare education market, in my view, the acquisition of Concorde was overall a great corporate move. In my opinion, the current balance sheet would allow not only new acquisitions but also new programs or even new campus additions. Even considering changes in regulations, lower scholarships for students, or lower relationships with corporations or brands, UTI does appear undervalued.

Universal Technical Institute

Founded in 1965, Universal Technical Institute is a company that offers training programs for professionals in the technical industry and transportation.

The company currently offers certification programs and degrees in more than 16 points of education in the United States. The schools that stand out the most in its portfolio are Motorcycle Mechanic & Marine Mechanic Institute, NASCAR Tech Institute, and MIAT College of Technology among others. These campuses where Universal Technical Institute offers its services are federally certified and are part of the scholarship and financing programs for students throughout the country.

The forecasts for this type of industry in which the company trains its students are positive, and point to a great growth in job offers that statistically translates to more than 115,000 open positions per year from the replacements of human capital and current equipment towards the year 2030. The market of global education technology grows at a CAGR of close to 13.6%.

The global education technology market size was valued at USD 123.40 billion in 2022 and is expected to expand at a compound annual growth rate (CAGR) of 13.6% from 2023 to 2030. Source: Education Technology Market Size

Due to the historical presence that the company has within these markets, the study within its programs not only implies access to technical knowledge and training in this sense but also opens the doors to the professional world due to the good relationship that the company maintains with a range of service providers from different end markets as well as other training institutions and government institutions.

The operations are organized in a single segment within which the 16 training campuses that the country maintains are covered, and 99% of the income comes from the payment of registration fees and the monthly subscription of its students. Due to the authorization that we mentioned above, in many cases, part of these payments are through federal financial entities that pay for the training fees of the students.

With that about the business model, I believe that it is worth having a look at the company mainly because of the outlook given for 2024. Universal Technical Institute expects 2024 net sales close to $705-$715 million and 2024 Adjusted EBITDA of about $98-$102 million.

Healthy Balance Sheet With A Good Amount Of Cash

As of June 30, 2023, Universal Technical Institute reported cash and cash equivalents of about $110 million, restricted cash close to $3 million, receivables of $25 million, and total current assets close to $164 million. Total current assets are larger than total current liabilities, and cash in hand appears significant. Hence, I believe that liquidity is not a problem.

Besides, with property and equipment close to $266 million, goodwill of $28 million, and intangible assets of $19 million, total assets were equal to $706 million. The asset/liability ratio is well over 1x.

The list of liabilities does not seem significant, however, I believe that we may have to follow carefully the total amount of debt, which is not small. In the last quarterly report, deferred revenue stood at $57 million, with current debt of $2 million, long-term debt close to $160 million, and total liabilities of $486 million.

Healthcare Net Sales Growth Could Bring More Diversified And Solid Net Sales

In the last quarterly presentation, the company noted that Universal Technical Institute expects to deliver significant healthcare revenue in 2024. The addition of Concorde is expected to bring a significant amount of net sales, which will most likely have a beneficial impact on the market capitalization of Universal Technical Institute.

I also believe that the global healthcare education market growth will most likely bring significant net sales growth. This new market, which is expected to grow at a CAGR of close to 8.6%, appears to be growing at a larger pace than the U.S. education market.

The global healthcare education market has an estimated compound annual growth rate of 8.6% and a revenue size in the region of $108.7 billion in 2023. Source: Healthcare Education Market Size, Share, Trends and Revenue Forecast

The U.S. Education Market was estimated at USD 1.4 trillion in 2021 and is anticipated to reach around USD 3.1 trillion by 2030, growing at a CAGR of roughly 4.2% between 2022 and 2030. Source: Custom Market Insights

Acquisitions, New Programs, Program Expansions, Or New Campus Additions Could Bring Net Sales Growth

The growth strategy is oriented on the one hand towards organic growth that comes from the participation of new students in its programs as well as the recommendation and success of these programs in different segments of society. On the other hand, it points to inorganic growth through the acquisitions of new establishments for campuses or contact with professionals from different industries to expand their services. In the latter case, the company is currently seeking to expand its training offering toward end markets within the medical industry. The acquisition of Concorde Career College in May 2022 is a clear example that will allow the training of new professionals oriented in this regard.

In addition, the company maintains an active campaign to attract students with a presence in tertiary education institutions throughout the country, generating agreements with schools, and offering talks for dissemination and information about the services it offers. The company also maintains an active presence in military centers to attract potential students of technical careers to their establishments.

Relationships With Brands In The Industries Could Bring More Jobs For Students As Well As Demand For The Stock

The relationship that the company maintains with the different participants of the technical industries in the country generates a breadth of job offers for its graduates and maintains active recognition of the services that the company offers. With this in mind, the relationships built with well-known brands out there are quite impressive. I believe that these initiatives may bring opportunities for students as well as demand for the stock.

Trading Multiples Of Other Competitors In The Same Sector

According to SA, UTI competes with other companies that trade at close to 9.6x Forward EBITDA, 13x Forward EBIT, and Price/Cash Flow of 7.9x. Given those figures, I believe that Universal Technical Institute is trading a bit undervalued. In my view, assuming an exit multiple of 8-10.5x FCF would be conservative.

Given Previous Financial Figures And My Own Expectations, I Offered My Income Statement Expectations And Cash Flow Expectations

My expectations include 2030 revenues of about $922 million, with revenue growth ranging from 11% to about 7% from 2021 to 2030.

Operating expenses would include 2030 educational services and facilities worth $431 million, selling, general, and administrative expenses close to $371 million, and total operating expenses of about $802 million. Additionally, with 2030 interest expense of about -$11 million, 2030 net income would be close to $100 million.

My cash flow expectations include 2030 net income worth $100 million, depreciation and amortization worth $37 million, amortization of right-of-use assets close to -$12 million, and stock-based compensation of about $15 million.

Besides, with changes in receivables of $38 million, changes in notes receivable of -$5 million, and changes in accounts payable and accrued expenses of $6 million, I also included changes in deferred revenue of -$45 million. In sum, I obtained 2030 CFO of close to $145 million, and with 2030 purchase of property and equipment close to -$80 million, 2030 FCF would be close to $67 million.

I checked the Universal Technical Institute’s competitors, which report a WACC between 5% and 10%. With this in mind, I used a WACC close to that figure. Besides, with an exit multiple of 8x-10.5x, the implied equity forecasts would be between $421 million and $691 million with a median of $514-$568 million.

If we divide by 34.075 million shares, the implied forecast valuation would be $12-$20 per share, and the median price would be $15-$17 per share. Additionally, the maximum IRR would be close to 10.9%.

Competitors

The technical training industry in the United States is highly competitive and highly fragmented with no competitor maintaining majority positions in the market. The offer in this sense is broad and comes from institutions and for-profit private businesses as well as different training programs offered by federal institutions and to a lesser extent regulated and unregulated digital education.

There is great competition towards secondary schools to attract future students as well as to maintain relationships with their leadership cultures. Companies that currently maintain a nationwide infrastructure similar to Universal Technical Institute are Lincoln Technical Institute and Tulsa Welding School.

Risks

There exists a series of direct risks, including changes in education legislation, which could affect the company’s operating model. In this sense, another of the risks that are particular to the company’s business has to do with future financing or the restrictions that exist for student scholarships, which would result in a reduction in enrollment year after year.

Of course, the legislative changes in general on educational laws in the country, the economic circumstances of inactivity such as the errors in the projection of the growth of the industry, and the inability to deepen the relationship with the different points of arrival of the potential students are factors that must also be taken into account within this analysis.

Conclusion

Universal Technical Institute delivered beneficial guidance for 2024 and expects to offer many benefits from the acquisition of Concorde. I believe that including healthcare education will not only bring more diversified and solid net sales. I think that the healthcare education market may also offer significant growth to the company. Besides, new acquisitions, new programs, or program expansions could also bring significant inorganic growth or organic growth in the coming years. The assets and the cash in hand appear sufficient to finance further expansion. There are obviously risks related to regulation, restrictions that exist for student scholarships, or a break in relationships with brands and corporations. With that, I really think that Universal Technical Institute appears undervalued.