Universal Technical Institute currently trades at $37.58 and has been a dream stock for shareholders. It’s returned 525% since April 2021, blowing past the S&P 500’s 68.6% gain. The company has also beaten the index over the past six months as its stock price is up 22.2% thanks to its solid quarterly results.
Is there a buying opportunity in Universal Technical Institute, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Universal Technical Institute Will Underperform?
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 Growth in New Students Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Universal Technical Institute, our preferred volume metric is new students). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Universal Technical Institute’s new students came in at 5,449 in the latest quarter, and over the last two years, averaged 10.9% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Cash Flow Margin Set to Decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
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 1.9% for the last 12 months will decrease to 2.1%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared 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 falls short of our quality standards. With its shares beating the market recently, the stock trades at 18.1× forward EV-to-EBITDA (or $37.58 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at the Amazon and PayPal of Latin America.
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