Why Ulta Beauty Stock Is Back on Investors’ Radar

Ulta Beauty (ULTA) has drawn fresh attention after a period of weaker share performance, with the stock down about 3% over the past month and about 26% over the past 3 months.

The recent weakness, including a 7 day share price return of down 5.13% and a 90 day share price return of down 26.04%, contrasts with a 1 year total shareholder return of 22.55%. This suggests momentum has cooled after a strong longer term run.

If Ulta’s recent pullback has you thinking about where else consumer demand and growth stories could emerge, it might be worth scanning 20 top founder-led companies

With Ulta shares recently under pressure but the company still posting annual revenue of about US$12.4b and net income of about US$1.2b, you have to ask: is this weakness a buying opportunity, or is the market already pricing in future growth?

Most Popular Narrative: 18.2% Overvalued

According to one widely followed narrative, Ulta Beauty’s fair value sits at about $427.41, which is below the recent share price of $505.20, setting up a more cautious valuation story.

Ulta, the other company I was thinking of cutting, has a surprisingly favorable relative valuation in the beauty retail space. It has decent margins and actually is able to direct decent amounts of buybacks. Beauty products in particular make a lot of sense to be sold alongside salon services in a storefront so you can actually suss out the high-end products in person. They have numerous private label brands and partnerships that attract customers, providing a small buffer to their expanding loyalty program. They are at their lowest ever P/E ratio right now at only 13, but with a high P/S and book ratio of 7, which is odd to me. They have a strong Return on Capital Employed (ROCE) and are free from debt. However, being a pure-play storefront with little room to grow aside from the untested waters of abroad leaves this company with a likely case of declining margins and earnings before only being able to grow modestly in the future. It is certainly a giant that can grow bigger, but the execution risk amid growing competition from e-commerce and other legacy storefronts in the US may take away their market share in areas that are already saturated with stores. Perceived undervaluation is mostly tangible under assumed multiple expansion, which does not leave a whole lot of room for an edge.

Curious what earnings path and profit margins would need to hold up for that fair value to make sense over time? The narrative leans heavily on sustained returns on capital and a future profit multiple that assumes Ulta keeps standing out in a crowded beauty retail market.

Result: Fair Value of $427.41 (OVERVALUED)

However, stiff competition from e commerce and other beauty retailers, along with any hit to Ulta’s strong margins, could quickly challenge that fair value story.

Another Take: DCF Points to Mild Undervaluation

While the user narrative sees Ulta Beauty as about 18.2% overvalued at a fair value of $427.41, our DCF model arrives at a fair value of $524.59. With the stock at $505.20, that implies it is trading about 3.7% below this estimate. Which story do you find more convincing?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Ulta Beauty for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 44 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

If the mixed messages on valuation have you undecided, this is a good time to look at the details yourself and move fast. To round out your view, check the 3 key rewards

Looking for more investment ideas?

If Ulta has raised fresh questions for you, this is the moment to widen your search and pressure test other opportunities before the market moves on without you.

• Target reliable cash generators by scanning the solid balance sheet and fundamentals stocks screener (46 results) and focus on companies with stronger financial footing.
• Spot potential mispricings early by reviewing the screener containing 22 high quality undiscovered gems and see which businesses the market might not be paying attention to yet.
• Prioritise resilience by checking the 69 resilient stocks with low risk scores and compare stocks that carry lower overall risk scores.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.