The Most Important Companies in America
Lincoln Education and Universal Technical Institute Must Thrive
Everyone by now has experienced and felt the massive shortage of labor in America, especially anyone in need of a plumber, a car mechanic, a carpenter, or an electrician. You name it and there doesn’t seem to be enough of them. Almost one-half of businesses recently surveyed say they are short of skilled labor.
The Federal Reserve Bank of Minneapolis recently reported that across the nine states it covers, 76% surveyed said labor conditions were “very tight.”
And all of this is happening before a massive upgrade to our country’s infrastructure. A big infrastructure bill was just passed, and this will make the squeeze on labor even tighter.
The construction industry association estimates that it needs “an additional 2.2 million new hires from 2022 through 2024 to keep up with demand.”
And this is without considering any major onshoring effort to bring manufacturing and trades back to America. Supply chain problems have shown that a reliance on a tight global supply chain may not make strategic sense for America anymore.
What is driving this? Demographics and age. The American workforce is older than you would imagine. For example, consider that the average age of a plumber is 55 or that the average age of a welder is 56. And what did COVID do to our older worker demographic? Like many things COVID was an accelerant, and COVID led to a mass retirement event.
According to a recent Washington Post article, “America’s retiree population grew by about 3 million during the pandemic, about double what would have been expected given pre-pandemic trends.”
So, who benefits from the massive shortage of skilled labor and the need to train more people? I am an investor in two companies that do: Lincoln Education (NASDAQ: LINC) and Universal Technical Institute (NYSE: UTI).
Lincoln is a private technical school that teaches welding, electrical, HVAC, automotive tech and nursing to over 14,000 students a year. The company boasts a 70% graduation rate, and an over 80% job placement rate (which handily beats community college rates).
I wrote about Lincoln Education in July 2020 when the stock was around $5 per share and said that I would be shocked if the company didn’t increase its cash flow by at least five times in the next three years.
Turns out that one year later, Lincoln has already increased its cash flow by 140%. The student population is up nearly 30% and while these schools have high fixed costs, incremental EBITDA margins are roughly 40% with minimal additional capex required. If the company can return to its 2010 level of annual student population (18,000), the company should generate roughly $80 million of cash flow or over $2.40 per share on a fully diluted basis including its preferred share conversion.
But the story gets better because the company has taken advantage of the super strong real estate market and did sale/leasebacks of its Denver and Dallas metro campuses and is about to do the same in Nashville. In total, these transactions netted the company $80 million. Adding the proceeds to existing cash and ongoing cash flow, the company should have roughly $110 million in cash and no debt, or $3.33 per share in cash in early 2022. At roughly $7 a share, LINC has almost half its market cap in cash and will generate almost $1 a share in EBITDA this year. As EBITDA makes its way to over $2 per share, its going to be increasingly difficult to ignore. To say that Lincoln is not only strategically important but also undervalued is an understatement.
Universal Technical Institute
Universal Technical Institute is another technical institute that has traditionally focused on automotive technicians but is now branching out into welding and now through a recent acquisition is moving into aviation, HVAC and wind power.
Universal is growing faster than Lincoln by being more aggressive launching new programs and actively trying to use its cash hoard of over $100 million to grow.
David LaSalle with Perlus Investments has been an investor in Universal since it was $2 per share in 2017 and believes the company is on a trajectory to produce more than $100 million in EBITDA (David has been a big help for me to get up to speed on Universal and I’m very grateful).
David tells me that technical schools like Universal are even better businesses today because COVID has accelerated the shift to a balanced in-person and online course of study that allows capacity utilization to be higher.
Universal just announced blowout fourth quarter results in which revenue grew 28% and cash flow grew 100%. With forecasted double digit student growth and a slew of new programs to offer, UTI is poised for strong growth in 2022. Despite that, the company trades at 7 times next year’s estimate of unlevered cash flows.
David thinks Universal is on its way to producing $120 million of EBITDA and would trade at 10 times that number or more, meaning that the company would not trade near $9 per share but more like $28 per share.
For profit schools developed an ugly name in the 2000s for taking advantage of students, loading them up with massive loans and dubious degrees. The Obama administration cracked down hard on the worst offenders.
Technical schools like Universal and Lincoln are different. They provide real skills and more than 70%+ of their students graduate and job placement is over 80%.
I would argue that the shortage in skilled labor is so acute and so threatens our country, especially if we need to bring back more manufacturing from Asia, that Lincoln and Universal’s success is in our nation’s best interest.
ANGI HomeServices’ Job Posting Proves the Importance of Training
I’ve written a few times critically about ANGI Homeservices and how they were solving for the wrong problem, which is not aggregating customer demand, but instead how to solve for the ever-increasing shortage of skilled workers.
So, it was both surprising and not surprising that they were trying to hire someone earlier this summer to start an in-company upskilling program to help solve the shortage of workers:
ANGI still has a $4.7 billion market cap, despite not growing and restructuring. Wouldn’t it just be easier to buy either or both Lincoln and Universal?
How we as a country deal with the massive shortage of skilled labor could not be more important. This is not only a political problem, but it is also a problem more and more companies are going to have to solve. The only solution is to train millions of people and that means that both Universal and Lincoln will continue to grow their student count, experience massive operating leverage, and generate fabulous returns for investors. And we as a country should be rooting them on because their success is in our own best interests.