Ulta Beauty Inc (ULTA) Stock Is a Steal Below $200
Once the prettiest stock in the market, Ulta Beauty Inc (NASDAQ:ULTA) stock has hit a slump.
Source: Mike Mozart via Flickr
Investors who were once bullish on the potential of double-digit comparable sales growth into perpetuity have now hit the pause button as competition in the cosmetics space intensifies. Department stores are more heavily discounting their beauty products. Amazon.com, Inc. (NASDAQ:AMZN) is getting into the beauty game.
All in all, ULTA stock has tanked from $310 in June 2017 to $195 today. It’s been a rough ride for ULTA shareholders. The technicals on the stock now look broken. Each peak has been lower than the prior peak, indicating net supply is increasing.
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But the fundamentals haven’t changed much at all. So while there might be some near-term turbulence in ULTA stock, now seems like a great time to accumulate shares.
ULTA’s Fundamentals Look Good
Here’s the number one reason to buy ULTA stock: the 35%-plus haircut in ULTA stock has happened despite there being no red flags in its numbers.
Comps are still positive in the double-digit range. E-commerce sales are on fire. Traffic is up. Average ticket is up. Gross margins are up. The operating expense rate is falling back. The loyalty program is booming. The unit expansion narrative remains on track.
In fact, results have been so good that ULTA actually hiked its full-year guide last quarter. Comparable sales are expected to be up 10% to 11% (versus 9% to 11% prior). E-commerce sales are expected to be up 60% (versus 50% to 60% prior). Earnings growth is expected in the high-20’s range (versus mid-20’s prior).
All that positive news and still, ULTA stock has fallen more than 35% since June. Naturally, everyone’s eyes turn towards the valuation.
But even that isn’t maxed out. There is no denying that ULTA stock is richly valued. What other retailer is being given a 23.2-times multiple on this year’s earnings estimate?
Then again, what other retailer is posting comparable sales growth consistently north of 10%, growing e-commerce sales in the 50% to 60% range, expanding gross margins, leveraging operating expenses, and looking at 25%-plus earnings growth this year?
The big multiple makes sense.
In fact, the valuation should be much richer. This is a company that has grown earnings by more than 25% per year over the past 5 years, and is expected to grow earnings by nearly 19% per year over the next five years. A 23.3-times fiscal 2017 earnings multiple isn’t all the expensive for a 20%-plus earnings growth story.
Just look at the market. The S&P 500 is trading at only a slightly lower 2017 earnings multiple (19.5-times) for about half as much growth (roughly 11%).
In other words, ULTA stock gives you much more bang for your buck.
Bottom Line on ULTA Stock
The technicals say it’s broken, but the fundamentals say it’s grossly undervalued.
I think that means ULTA stock is due for some near-term turbulence, but in the long-term, this stock will trend significantly higher and generate serious alpha.
And I haven’t even touched on the fact that the company’s effective tax rate was 37.5% last year and 36.9% the year before that. As tax reform becomes more of a hot topic as we enter 2018, Ulta Beauty stands to gain a lot if the corporate tax rate does get cut.
None of that potential upside is priced into the stock at these depressed levels.
Overall, there are many reasons to buy ULTA stock, the biggest being that it has been unfairly beaten up despite being the leader in a secular growth market. I’m taking this beating as an opportunity to accumulate a long-term position at discounted prices.
As of this writing, Luke Lango was long ULTA and AMZN.
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