Universal Technical Institute currently trades at $31.80 and has been a dream stock for shareholders. It’s returned 402% since July 2020, blowing past the S&P 500’s 96.5% gain. The company has also beaten the index over the past six months as its stock price is up 28.4% thanks to its solid quarterly results.
Is there a buying opportunity in Universal Technical Institute, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Universal Technical Institute Not Exciting?
Despite the momentum, 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.
1. Weak Operating Margin Could Cause Trouble
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Universal Technical Institute’s operating margin has been trending up over the last 12 months and averaged 7.8% over the last two years. The company’s higher efficiency is a breath of fresh air, but its suboptimal cost structure means it still sports paltry profitability for a consumer discretionary business.
2. 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 slightly fall. Their consensus estimates imply its free cash flow margin of 9.1% for the last 12 months will decrease to 8.4%.
3. 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 9.2%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.
Final Judgment
Universal Technical Institute’s business quality ultimately falls short of our standards. With its shares outperforming the market lately, the stock trades at 14.3× forward EV-to-EBITDA (or $31.80 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. Let us point you toward our favorite semiconductor picks and shovels play.
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