Warren Buffett thinks Ulta stock is a buy at a cheap 12.5x earnings.
Ulta Beauty (ULTA 11.17%) stock got a facelift Thursday after The Wall Street Journal reported that mega-investor Warren Buffett has taken an interest in the company. Citing public filings, the Journal noted that Buffett’s Berkshire Hathaway (BRK.A 0.61%) (BRK.B 0.54%) has acquired 690,106 Ulta shares since making its last 13F filing with the Securities and Exchange Commission.
What’s Buffett up to?
According to the Journal, Buffett’s Ulta stake was worth $266 million at the end of June, when the stock cost roughly $380. Unfortunately for Buffett, Ulta stock proceeded to fall toward $320 — but it’s looking a lot better now.
As news of the billionaire’s interest spread today, shares of the cosmetics company soared about 12% through 12:40 p.m. ET. At $368 and change, Ulta stock still isn’t worth what Buffett paid for it, but it’s getting close to breakeven.
Is Ulta stock a buy?
Now the question is whether Ulta’s stock price can sustain the windfall momentum provided by today’s news. The answer to that question is — maybe.
Last-quarter’s earnings report wasn’t terribly encouraging. Ulta experienced only 3.4% sales growth when it reported fiscal Q1 2024 earnings in May, and half that growth came from new store openings. Same-store sales at the retailer grew only 1.6%. Even worse, per-share profits dropped 6% — the opposite direction you’d expect with growing sales. The reason for this was that operating profit margins contracted by 210 basis points, falling to 14.7%.
Ulta responded to the bad news by lowering total sales guidance for the full year and cutting same-store sales guidance nearly in half, to about 2.5%. Again, news about profits was even worse: Ulta forecast that operating profit margins will continue to erode and probably fall to 14% or lower.
On the plus side, Ulta insists it’s still planning to spend $1 billion buying back shares this year, so management must agree with Buffett that the stock is undervalued. Ulta stock cost only 12.5x earnings today, so they may both be right.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Ulta Beauty. The Motley Fool has a disclosure policy.
