The stock of Universal Technical Institute (NYSE:UTI, 30-year Financials) is estimated to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $6 per share and the market cap of $196.4 million, Universal Technical Institute stock is estimated to be significantly overvalued. GF Value for Universal Technical Institute is shown in the chart below.
Because Universal Technical Institute is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 3.84% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Universal Technical Institute has a cash-to-debt ratio of 0.47, which ranks worse than 73% of the companies in Education industry. Based on this, GuruFocus ranks Universal Technical Institute's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of Universal Technical Institute over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Universal Technical Institute has been profitable 5 years over the past 10 years. During the past 12 months, the company had revenues of $289.7 million and loss of $0.19 a share. Its operating margin of -2.54% worse than 69% of the companies in Education industry. Overall, GuruFocus ranks Universal Technical Institute's profitability as poor. This is the revenue and net income of Universal Technical Institute over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Universal Technical Institute's 3-year average revenue growth rate is worse than 80% of the companies in Education industry. Universal Technical Institute's 3-year average EBITDA growth rate is 16.1%, which ranks in the middle range of the companies in Education industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Universal Technical Institute's return on invested capital is 1.45, and its cost of capital is 4.07. The historical ROIC vs WACC comparison of Universal Technical Institute is shown below:
In closing, the stock of Universal Technical Institute (NYSE:UTI, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks in the middle range of the companies in Education industry. To learn more about Universal Technical Institute stock, you can check out its 30-year Financials here.
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