Another three months' worth of earnings grades have been doled out -- almost. Lest the for-profit education industry get an "incomplete" this quarter, though, we still have one more to report. Blue-collar educator Universal Technical Institute (NYSE:UTI) releases its Q4 and full-year 2006 numbers Wednesday afternoon.

What analysts say:

  • Buy, sell, or waffle? Eight analysts follow UTI, which gets two buy ratings, and three each for hold and sell.
  • Revenues. On average, they're looking for 5% quarterly sales growth to $88.4 million.
  • Earnings. Profits, in contrast, are predicted to fall by half to $0.16 per share.

What management says:
In late September, UTI announced a round of layoffs that will reduce its employee headcount by a bit less than 3%. Severance costs are expected to reduce fourth-quarter profits by $1.2 million pre-tax, but to more than make that up next year, as savings on salaries and benefits amount to $4.2 million to $4.5 million.

Don't expect to see these savings on the bottom line, however. In a clarification of the layoffs news, CEO Kimberly McWaters later clarified that UTI will spend the saved money on "sales and marketing efforts during fiscal 2007." Because it takes time for these kinds of "investments" to bear fruit, however, McWaters doesn't expect to see any benefit to net income until late fiscal 2007 or 2008.

What management does:
At first glance, the above looks like little more than moving money from one corporate pocket to another, and thus unlikely to affect the margin trends shown below (where rolling gross, operating, and net margins have each been sliding over the past year).

But consider McWaters' rationale: She noted in last quarter's earnings report that "lower capacity utilization due to additional capacity added during the current fiscal year" was behind the firm's declining profits. Ramping up spending on marketing, therefore, aims to bring more students through the doors, and into the schools' new seats -- allowing fixed costs to be spread out among more revenue-producing students. If the marketing campaign is successful, we could see a turnaround in operating margins result.

Margins %

3/05

6/05

9/05

12/05

3/06

6/06

Gross

54.3

53.4

53.3

53.0

52.3

51.2

Op.

19.2

18.2

17.9

17.5

17.0

15.2

Net

11.4

11.2

11.5

11.2

10.6

9.4

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
UTI is a July 2006 recommendation of the Fool's premier small-cap investing newsletter, Motley Fool Hidden Gems. Naturally, therefore, when UTI reported its fiscal Q3 numbers last quarter, our analyst team took a look and reported back on its findings. According to analyst Jim Gillies, "the turnaround thesis" that first inspired co-lead analyst Tom Gardner to recommend UTI "remains intact."

In a spark of prescience, Jim opined in his August update that "we actually want to see . greater spending . on advertising" in order to improve enrollments at UTI. Judging from the September press release, we're about to get our wish.

Competitors:

  • Apollo Group (NASDAQ:APOL)
  • Career Education (NASDAQ:CECO)
  • Corinthian (NASDAQ:COCO)
  • DeVry (NYSE:DV)
  • ITT Educational Services (NYSE:ESI)
  • Lincoln Educational Services (NASDAQ:LINC)

Interested in outstanding small-cap stocks flying under the market's radar? Join Tom Gardner and other investors like you on the Motley Fool Hidden Gems discussion boards -- available for 30 days with afree trial.

Fool contributor Rich Smith does not own shares of any company named above. The Fool's disclosure policy studies hard.