Universal Technical Institute has been on fire lately. In the past six months alone, the company’s stock price has rocketed 67.9%, reaching $25.88 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Universal Technical Institute, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
We’re glad investors have benefited from the price increase, but we're swiping left on Universal Technical Institute for now. Here are three reasons why UTI doesn't excite us and a stock we'd rather own.
Why Do We Think Universal Technical Institute Will Underperform?
Founded in 1965, Universal Technical Institute (NYSE: UTI) is a leading provider of technical training programs, specializing in automotive, diesel, collision repair, motorcycle, and marine technicians.
1. Cash Flow Margin Set to Decline
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict Universal Technical Institute’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 9.8% for the last 12 months will decrease to 7.9%.
2. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Universal Technical Institute historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 11%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Universal Technical Institute’s ROIC averaged 2.7 percentage point decreases each year. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Universal Technical Institute doesn’t pass our quality test. Following the recent surge, the stock trades at 23.3× forward price-to-earnings (or $25.88 per share). At this valuation, there’s a lot of good news priced in - we think there are better investment opportunities out there. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
Stocks We Like More Than Universal Technical Institute
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