Ulta Salon (ULTA) is a growth stock I have wanted to buy into for years. The reason I don’t own it already is the stock has consistently had a P/E in the 30s. Normally a 30s P/E doesn’t make me shy away from a growth stock, but Ulta had other risks too. Specifically, the company kept losing key management, like CEOs and CFOs, in rapid succession. If you’re a key member of management of a great growth stock, why would you leave the company and give up those lucrative stock options? After reviewing each case individually, I still didn’t understand why they would leave. Perhaps something bad was coming down the road that management could see? Maybe these guys did leave for personal reasons? Either way this scenario raised the risk level in the stock. At 35 times earnings, ULTA was just too high to buy into.
Then last quarter Ulta missed estimates by a couple of cents and lowered guidance. The stock fell, and that’s where we are today. Now ULTA has a reasonable P/E of 24 and is off its highs, so the question is: Is this a buy-on-the-dip opportunity or will ULTA warn again and the stock fall once more?
One Year Chart
ULTA put out 22% profit growth last quarter, which is good, but this figure was estimated at 29% a couple of quarters ago and 25% last quarter. So there’s now a trend of the stock not coming through as it should, certainty takes a hit.
Next quarter’s estimate just got slammed down from 25% to only 9% profit growth. Also, Annual Profit Estimates dropped across the board. 2014’s fall from $4.22 to $3.82, that’s a 40 cent drop.
Fair Value
What’s more is ULTA still isn’t really a deal here. The stock sells for 24 times 2014 estimates, and I feel the P/E should be 27. The problem is if Ulta Salon has estimates fall again, to say $3.44, then the stock will be selling for 27 times these reduced earnings.
When I look to 2015’s Fair Value I see good upside in the stock. 34% for one year, that’s solid. But can we trust the company will come through as promised? We can’t.
Sharek’s Take
I’m stock on what to do with Ulta. It looks like estimates will fall again, and the stock will too. So I’m not buying in today. I also think that by passing on this great growth story I’m missing out on my chance. Ulta has 22% estimated long-term growth rate, these stocks are hard to come by. If the company beats the street and estimates rise, the stock will jump before I can get in.
If I buy ULTA, I think it will drop. If I don’t, I think it will jump. I’m stuck either way. But in the end, the data tells me ULTA has a high probability of lowering estimates when it reports earnings, so for now I sit on the sidelines.
View the Earnings Table here. View the Profit History here.View the Ten Year Chart here.
