Goldman Sachs upgraded Ulta Salon (ULTA) after it reported last quarter’s earnings. The stock got upgraded from Neutral to Buy with a $118 price target.
I’ve been tracking ULTA for years, I’m trying to get in, but I don’t think it’s worth the upgrade. Here’s why:
One Year Chart
ULTA has been a 30% grower in past years, but recently that growth rate has slipped. A couple quarters ago the company had 22% profit growth, then management shocked investors and slashed the next qtrs estimates, which when delivered last quarter showed 9% profit growth. The thinking was the 9% quarter was going to be a one-time thing, and that the stock might rebound (this was when the stock got down top the $80s a few months ago). So I was caught between buying with the risk, or waiting to see what would happen.
After last quarter’s profits came out ULT did lower estimates again — across the board. Still, Goldman upgraded the stock. But I don’t think the stock should have gotten an upgrade. When I prepared these charts on March 28th, ULTA had a P/E of 27 but profit growth is expected grow only 16% this year. Keep in mind estimates have been falling, so if the trend is our friend then ULTA might not even do that.
Fair Value
Ulta Salon is a premium brand and has proven its strategy can grow rapidly in the long-run. Perhaps this year is an aberration. I think this is the case, and feel profit growth will rebound eventually. My Fair Value on ULTA is 24 times earnings. I think the stock is worth $88 now, and not worthy of an upgrade.
Sharek’s Take
Ulta Salon is a stock I wish to own. I feel we can compound our money at 20% a year. The trouble is the stock is consistently too high to buy. Even now ULTA has a 27 P/E yet is expected to grow profits only 16% over the next four quarters. There’s also this little question about management that never got addressed. To me Ulta Salon is overvalued here, but is on my radar and I would like to buy it on a dip.
View the Earnings Table here. View the Profit History here.View the Ten Year Chart here.
