Drop in Student Enrollment Spells Bad News for Universal Technical, Capella Education

Includes: CPLA, UTI
by: Zacks Investment Research

Universal Technical Institute Inc. (NYSE:UTI) is witnessing a decline in the enrollment of new students.

The decline in new enrollments accelerated to 13% during the first-quarter 2011, following a 5% decline in the fourth-quarter 2010. The company also warned that enrollment of new students for fiscal 2011 will be below the prior-year, and consequently will result in single-digit revenue growth.

Furthermore, average enrollment decelerated to 8.5% during the first quarter of 2011 from 15.4% in the previous quarter.

The current threat to the education sector is the regulation proposed by the Department of Education, which is weighing upon students' enrollments and the company's profits. The Department of Education proposed that an educational program could only qualify for Title IV funds if it helps in achieving gainful employment, which includes the criteria of loan repayment rate and debt-to-income ratios.

Institutions are being watched more closely due to the rise in the default rate of student loans, and are now being asked to submit information relating to recruitment procedures and use of student grants.

Another for-profit education institute, Capella Education Company (NASDAQ:CPLA) cautioned that new enrollment in the first-quarter 2011 is expected to fall by 35%. The company also projected slower growth in the top line. After registering an increase of 21.3% during the fourth quarter, the company now expects revenue to increase in the range of 8.5% to 9.5% in the first-quarter 2011.

Universal Technical provides post-secondary technical education, offering undergraduate degree, diploma and certificate programs to students seeking careers as automotive, diesel, collision repair, motorcycle and marine technicians.

The company's programs are highly dependent on the health of the automobile sector, which was hit hard by the recent economic downturn. This is especially a matter of concern for Universal Technical as its prospective students may shift preferences to other sectors.

Currently, we are maintaining a long-term 'Underperform' rating on the stock until we see a catalyst to trigger growth in new enrollments. Moreover, Universal Technical holds a Zacks #5 Rank, which translates into a short-term 'Strong Sell' recommendation.