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Mark Yu
Mark Yu
Articles (412)  | Author's Website |

Ulta Beauty: When Investor Preparedness Precedes Underwhelming Outcomes

Both analysts and investors remained upbeat on the stock before it lost a third of its value in one day

September 10, 2019 | About:

Ulta Beauty (NASDAQ:ULTA) beat earnings expectations on for its previous fiscal year, and analysts had remained bullish, dishing out "outperform" and "buy" recommendations for the beauty retailer’s stock to the investing public. The Illinois-based company soared as recently as July to its all-time highs — climbing nearly 50% for the year — before it came crashing down to today’s levels.

For the record, Ulta Beauty consistently beat earnings expectations for the past year, until it did not in its recent quarter. The company missed earnings estimates by 4 cents while it forecasted flat to lower earnings in the coming quarter on Aug. 29. This outlook sent Ulta’s stock into a tailspin in which it lost 30% in one day.

Investors could not have foreseen such a drastic fall in stock price. Even relying on Ulta’s stock valuation in recent years would have blinded diligent investors. Despite reaching a peak stock price in recent months, Ulta was still trading at 30 times its trailing earnings — compared to its historic average of 32.

At Tuesday's price of $225 a share and a price-earnings ratio of 19, investors seem set to benefit from bountiful upside should Ulta climb back to its historic average multiple. Should Ulta trade at 32 times earnings, the company would have a stock price of $370 a share.

Meanwhile, investors should also realize that Ulta stock has never dipped to these earnings multiple levels. The retailer’s stock price has never experienced a similarly massive drop in its history, either. Back in 2017, its share price dropped 36% in a span of three months before slowly climbing back again as it has continued to beat earnings expectations.

With no debt, almost negligible intangible assets, continually growing store count, mid-single digit comparable sales growth projections and rank as consumers' first choice of the beauty shop, Ulta may have found the floor at these price levels and may be able to bounce back up again.

Disclosure: Long Ulta. 

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About the author:

Mark Yu
I'm a doctor in physical therapy (DPT) with a passion for finance. Not a registered financial analyst. Value seeker. Long only. Global investing. Long-term investing.

I attempt to dissect one company filing every day. I dislike goodwill and intangible assets.

One company (review) a day keeps the speculation (hopefully) away.

"The only source of knowledge is experience."

"I have no special talent. I am only passionately curious." - Albert Einstein

"To strive, to seek, to find, and not to yield." - Alfred, Lord Tennyson

"We find one a year, that's terrific. You do not need a hundred or a thousand great investment ideas to do well. You need a couple. And, the discipline is the most important thing." - Warren Buffett

Visit Mark Yu's Website

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