I’ve been wanting to buy stock in Ulta Salon (ULTA) for years now. The problem is the stock’s always too high to buy.
Last quarter, ULTA had decent profit growth of 18% as it beat the street by 3 cents. Sales rose a healthy 22%. These numbers fit the mold of a stock I would own, but the problem is the P/E is 25, and I don’t think ULTA has much upside.
Same store sales rose a healthy 9% last quarter, which is a good sign business is robust. High same store sales figures such as this usually mean the stock is headed higher. Still, this stock is too high.
Another bright spot is inventory per store was down for the first time in ten quarters. High inventory often leads to more markdowns, lower profit margins, and can lead to the store becoming stale. Not to mention high inventory could be a warning sign people aren’t buying.
One Year Chart
ULTA’s P/E of 25 is a tad high because the Est LTG is only 19%. Last quarter (then) the P/E was 27 and the LTG was 22%. Again too high. BTW Goldman upgraded the stock then and I disagreed. The stock was $100 then, $91 now.
Estimates show more teens profit growth ahead. Ulta used to be a 25% long-term grower. Now its a high-teens grower, and with that the P/E should come down. Still, people are valuing this franchise highly, and the problem with that is there’s little upside.
Fair Value
My Fair Value on ULTA is 24 times earnings. Even with my lofty P/E the stock is selling above my 2014 Fair Value. I could get in if I really wanted the stock, but it’s not giving me any upside this year and the stock’s not moving. This data was taken on 6/27, I’m writing this article on 7/14, and the stock’s $91.
Sharek’s Take
Ulta Salon seems to be regaining the confidence in investors it lost late last year when it missed by a couple cents and guided lower (you can see this clearly in the one-year chart). After the company has reported the last two quarters the stock has popped, which is a healthy sign.
The real trouble here is ULTA’s profit growth rate has been declining from over 30% per quarter to the high-teens. With that the P/E has got to fall or the stock can float along until the earnings catch up — and right now that’s what’s happening. The stock’s just not moving because it’s a little overvalued. ULTA doesn’t have the juice to push higher. I’ll continue to wait for better deal.
View the Earnings Table here. View the Profit History here.View the Ten Year Chart here.
