ULTA Stock Study (7-18-23)

I recently did a stock study on Ulta Beauty, Inc. (ULTA) with a closing price of $472.72. The original study is here.

M* writes:

     > With roughly 1,350 stores and a partnership with narrow-moat
     > Target, Ulta Beauty is the largest specialized beauty retailer
     > in the U.S. The firm offers makeup (43% of 2021 sales),
     > fragrances, skin care, and hair care products (20% of 2021
     > sales), and bath and body items. Ulta offers private-label
     > products and merchandise from more than 500 vendors. It also
     > offers salon services, including hair, makeup, skin, and brow
     > services, in all stores. Most Ulta stores are approximately
     > 10,000 square feet and are in suburban strip centers.

Over the past decade, this large-size company has grown sales and earnings at annualized rates of 14.7% and 18.9%, respectively. Lines are mostly up, straight, and parallel except for a sales/EPS dip in ’20. PTPM leads peer and industry averages by increasing from 12.3% to 16.1% with a last-5-year mean (excluding ’20, which was a downside outlier) of 14.0%.

Also over the past decade, ROE leads peer and industry averages by increasing from 21.8% to 62.9% with a last-5-year mean (excluding ’20, which was a downside outlier) of 45.8%. Debt-to-Capital is less than peer and industry averages. The company has no long-term debt, but the last-5-year mean is 40.6% (uncapitalized leases).

Current Ratio is 1.64 and Quick Ratio is 0.51. M* rates the company Exemplary for Capital Allocation, and Value Line gives an A rating for Financial Strength.

With regard to sales growth:

• CNN Business projects 8.8% YOY and 6.6% per year for ’24 (FY ends Jan 31) and ’23-’25 (based on 23 analysts).
• YF projects YOY 8.7% and 5.3% for ’24 and ’25, respectively (26 analysts).
• Zacks projects YOY 8.5% and 5.3% for ’24 and ’25, respectively (11).
• Value Line projects 5.9% annualized growth from ’23-’28.
• CFRA projects growth of 8.7% YOY and 6.9% per year for ’24 and ’23-’25, respectively.
• M* provides a 2-year ACE of 6.8% and projects 10-year annualized growth of 6.0% in its analyst note.

I am forecasting conservatively below the range at 5.0%.

With regard to EPS growth:

• CNN Business projects 4.6% YOY and 5.2% per year for ’24 and ’23-’25, respectively (based on 23 analysts), along with 5-year annualized growth of 8.0%.
• MarketWatch projects annualized growth of 7.2% and 7.4% for ’23-’25 and ’23-’26, respectively (29 analysts).
• Nasdaq.com projects 7.3% YOY and 9.0% per year for ’25 and ’24-’26 (15, 14, and 3 analysts for ’24, ’25, and ’26).
• Seeking Alpha projects 4-year annualized growth of 11.5%.
• YF projects YOY 4.7% and 6.2% for ’24 and ’25, respectively (28), along with 5-year annualized growth of 13.9%.
• Zacks projects YOY 4.3% and 7.4% for ’24 and ’25, respectively (14) along with 5-year annualized growth of 12.3%.
• Value Line projects 5.9% per year from ’23-’28.
• CFRA projects 5.5% YOY and 6.3% per year for ’24 and ’23-’25, respectively, along with a 3-year CAGR of 15.0%.
• M* projects long-term annualized growth of 9.7%.

I am forecasting near the bottom of the long-term-estimate range (mean of six: 10.2%) at 6.0%. I will use ’23 EPS of $24.01/share as the initial value rather than ’24 Q1 EPS of $24.60 (annualized).

My Forecast High P/E is 21.0. Over the past decade, high P/E has trended down from 42.1 in ’13 to 21.4 in ’22 with a last-5-year mean of 26.2 (excluding 99.8 upside outlier in ’20). The last-5-year-mean average P/E is 21.3. I am forecasting below the entire range.

My Forecast Low P/E is 14.0. Over the past decade, low P/E has trended down from 23.0 in ’13 to 13.8 in ’22. The last-5-year mean (excluding 39.9 upside outlier in ’20) is 16.3. I am forecasting near the bottom of the range (only ’22 is lower).

My Low Stock Price Forecast (LSPF) is the default $336.10 based on $24.01/share initial value. This is 28.9% less than the last closing price and 6.8% less than the 52-week low.

These inputs land ULTA in the HOLD zone with a U/D ratio of 1.5. Total Annualized Return (TAR) is 7.4%.

PAR (using Forecast Average—not High—P/E) of 3.5% is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 451 studies over the past 90 days (my study and 75 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, and Forecast Low P/E are 9.0%, 9.7%, 26.2, and 18.1, respectively. I am lower across the board. Value Line projects a future average annual P/E of 21.0, which is lower than MS (22.2) and higher than mine (17.5).

MS high/low EPS is $38.14/$18.93 vs. my $32.13/$24.01 (per share). 91 studies used low EPS under $10.00/share. Except for ’20 at $3.11, the company hasn’t seen earnings that low since 2017 (at $8.96/share, and 70 studies used a number less than that). I would argue these to be unreasonably low. As for high EPS, mine is lower due to a lower EPS growth rate.

MS LSPF of $304.90 implies a Forecast Low P/E of 16.1 vs. the above-stated 18.1. MS LSPF is 12.4% less than the default value of $18.93/share * 18.1 = $342.63, which results in more conservative zoning. MS LSPF is also 9.3% less than mine.

PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are two metrics I have recently begun to monitor. PEG is 1.54 (Zacks) while Relative Value is 0.90 (M*). These suggest the stock to be overvalued and undervalued, respectively.

I am also starting to familiarize myself with Kim Butcher’s “quick and dirty DCF.” According to this method, the stock should be priced at 17 * [$38.50 – ($0.00 + $0.00)] = $654.50 (i.e. stock undervalued by 28.0%).

I would look to re-evaluate ULTA under $420/share.