A bargain among small caps
This year’s massive outperformance by small caps has had “more than a few Wall Street analysts wiping egg from their faces”, says Richard Moroney on Forbes.com. With a median p/e of the S&P SmallCap 600 trading at 22 times trailing earnings, compared to “about 15 for the S&P 500”, the small caps are on a large premium historically. On the other hand, median earnings-per-share growth in the S&P SmallCap 600 is forecast to be 14% for 2006, compared to a 10% median for the S&P 500, so in price-to-earnings-growth terms, the valuations are similar. Yet small-cap bargains have become harder to find.
An exception, says Corey Hajim on CNNMoney.com, is the Universal Technology Institute (UTI, $24.39). Although the difficulties of the for-profit education sector are well documented, with “regulatory scrutiny, declining enrolment growth, class-action lawsuits and bad press”, UTI is in the right place at the right time. It specialises in training car mechanics – a market that is forecast to grow between 9% and 14% a year until 2014 as the number of cars on US roads continues to increase. The current difficulties of the domestic US car industry are not a significant worry to UTI, as its technicians fix cars made anywhere.
Yet the company’s shares have been unfairly hit along with those of the rest of the sector and consequently trade at almost their lowest level for two and a half years. With analysts expecting earnings of $1.05 per share in the year to September 2006, rising to $1.09 in 2007, that puts UTI on a current year headline multiple of 23.2 times, falling to 22.4 times in 2007. But UTI also has $76.3m in cash on its balance sheet, worth around $2.71 per share; strip that out and it is trading on a September 2007 multiple of under 20 times.
The company reported an unexciting second quarter – not least to do with changes in accounting practices and costs relating to expansion initiatives. Nevertheless, as anyone who has ever been close to the private-education system knows, inflation is a rather abstract concept in terms of yearly
fee increases. Top-line growth is forecast to be 20% in both 2006 and 2007 and, once things settle down, UTI will find itself well placed in a secular growth market.
