Last Monday, I quoted Universal Technical Institute (NYSE:UTI) CEO Kimberly McWaters explaining how "lower capacity utilization due to additional capacity added during the current fiscal year" hurt UTI's profitability through the third quarter. In the firm's fourth-quarter earnings report, we saw this situation continue. McWaters noted that with the firm's capacity now in excess of 25,000 students, but average fiscal 2006 student enrollment closer to 16,000, UTI currently operates at just 64.9% of capacity -- down 500 basis points from last year.
Yet UTI -- a Hidden Gems selection -- spent $46.1 million this year on capital expenditures, of which about $5 million per quarter was "maintenance capex." With capex standing at $35.1 million last quarter, it seems UTI probably spent about $6 million to further expand its already underutilized capacity this quarter.
Is that bad?
I think so. Here's the dilemma at UTI, as I see it: The firm has certain fixed costs, but it cannot presently spread those costs among its full potential complement of students. There are, quite simply, too many unoccupied seats not generating revenues. UTI needs to fill those seats if it is to improve operating efficiency. Although it's working to better "utilize capacity" by increasing advertising spending, its continued capital expansion works at cross-purposes to the effort.
A better idea, it seems to me, would be for UTI to take a page from another industry that's made real progress in reducing its seats-to-customers ratio: the airlines. Historical money-losers like Continental (NYSE:CAL), United Airlines (NASDAQ:UAUA), and U.S. Airways (NYSE:LCC) have made dramatic improvements to their profitability by taking the opposite approach from UTI's -- reducing capacity (by selling off airplanes) and thereby improving their load factors.
This idea isn't unique to the airline industry, either. Last month saw UTI peer Career Education (NASDAQ:CECO) sell off 15% of its school base (schools that appear to have had "capacity issues" similar to those UTI is experiencing). Investors rewarded that decision with an 8% hike to Career Education's stock price.
Read more about the airlines' turnaround in "Bin Laden Failed."
Motley Fool Hidden Gems analyst Jim Gillies provides a detailed analysis of the earnings report (available to current subscribers, and to readers who sign up for a free trial).
Fool contributor Rich Smith does not own shares of any company named above. The Fool has a studious disclosure policy.
