Case Study
Universal Technical Institute (UTI)
2016
– Case Description
Universal Technical Institute (“UTI”) was added to the Opportunity strategy in 2016 at prices ranging from $1.60 to $3 per share. The stock currently trades at $3.50 per share and we believe could eventually be worth $10 per share.
Process
UTI is a for-profit education company specializing in the training of mechanics for autos, motorcycles, and boat engines.
I often use UTI as the perfect example of an Opportunity stock….out of favor, with tremendous upside, and protected downside due to a strong balance sheet and strong long-term fundamentals. In UTI’s case, the company has no debt and over $1 per share of cash. Many view the for-profit education industry as a bad business funded by the government (i.e., taxpayers) and charging too much for degrees that provide little opportunity. This is true of some for-profit education companies, but I do not believe it is true for all. UTI is one of the exceptions in our opinion.
There currently exists a massive opportunity for mechanics demonstrated by the company’s 88% placement rate upon graduation. The 2016 UTI graduating class had a placement ratio of 4:1 (job opportunities for each graduate). Furthermore, the industry has changed. The mechanic is no longer a “grease monkey.” Your car today is a computer and the mechanics servicing these vehicles are trained “technicians.” The cost of a 12 month auto degree from UTI is roughly $35,000. Starting salaries for a general mechanic can be as high as $35,000 - $40,000 a year.
The opportunity to buy UTI arose as a result of industry regulation brought on by the Obama administration which served to reduce margins combined with a decline in student starts. UTI is a “counter-cyclical” business whereby in periods of rising unemployment student enrollment begins to accelerate as those out of work look to reposition themselves. The reverse is true during periods of low unemployment. Despite student enrollment continuing to decline, we began buying UTI because we felt at these levels our downside was limited given the strong balance sheet and we saw an opportunity for management to significantly reduce its cost structure and add new programs with 70%+ incremental margins. The Trump administration, and its deregulation position, only enhanced the story.
Final Result
The opportunity to buy UTI arose as a result of industry regulation brought on by the Obama administration which served to reduce margins combined with a decline in student starts. UTI is a “counter-cyclical” business whereby in periods of rising unemployment student enrollment begins to accelerate as those out of work look to reposition themselves. The reverse is true during periods of low unemployment. Despite student enrollment continuing to decline, we began buying UTI because we felt at these levels our downside was limited given the strong balance sheet and we saw an opportunity for management to significantly reduce its cost structure and add new programs with 70%+ incremental margins. The Trump administration, and its deregulation position, only enhanced the story.