5 Top Stocks to Own in 2014: ULTA

In part three of this five-part series, we look at Ulta Salon, Cosmetics, & Fragrance. It was a stock market gem through November, but then it saw a steep decline in December. Let's see where it could go in 2014.

Jan 3, 2014 at 5:30PM

In the third part of this five-part series, we look at the largest beauty retailer in the United States, Ulta (NASDAQ:ULTA). Ulta was one of the market's best-performing stocks in 2013 before stumbling late in the year. However, analysts believe it will regain its strength and return to form in 2014. Let's take a look at how Ulta could become one of the best-performing stocks next year and why we should be buying right now.

The beauty retail giant
Ulta Salon, Cosmetics, & Fragrance is the largest beauty retailer in the United States, providing a one-stop shop for all the beauty and salon products and services a consumer could desire. The company is dedicated to providing the highest-quality products at affordable prices, which is the recipe for success in any industry. Ulta currently operates 664 locations in the United States, along with its very popular website, www.ulta.com.

Findyourultaimage

The 2013 rally
Overall, the first 10 months of 2013 were great for Ulta and it had momentum going into the final months of the year. The stock saw a strong run of 26.91%, supported by earnings growth, expansion, and investor confidence. Here's a summary of the four reports released in 2013 and a chart of the rally they supported:

Quarter 4Q '12  1Q '13 2Q '13 3Q '13
Earnings Growth 37% 20.4% 29.6% 18.6%
Revenue Growth 30.3% 22.9% 24.8% 22.4% 
Comp-Store Sales +8% +6.7% +8.4% +6.8%

Screen Shot


The December decline
All was going well for Ulta until it released third-quarter results on Dec. 5. Prior to the release, Ulta's stock traded at $118 per share, but the earnings missed estimates on both the top and bottom lines and guidance came in much weaker-than-expected. Ulta now expects to earn $1.07-$1.10 per share when analysts expected $1.24 and it expects revenue in the range of $853 million-$867 million while analysts wanted to hear $895 million. Here's the stock's performance in December and how it reacted to the release on the 5th:

Screen Shot

After this dismal announcement, Ulta's stock was hit hard, dropping about 18% after-hours and finishing down 20.54% in the trading session that followed. The stock price continued its decline over the next several days, then rebounded slightly, but it still sits well below the $118 level. The steep decline has turned the stock negative for the year, but it could easily make a comeback in 2014.

A promising year ahead
The upcoming fourth quarter may not offer the growth numbers we have been accustomed to, but fiscal 2014 looks very promising for Ulta. Fourth quarter expectations of $1.07-$1.10 would put full-year earnings for 2013 in the range of $3.14-$3.17. Analysts expect earnings for fiscal 2014 to be right around $3.82, which would be an increase of 20.5%-21.7% year-over-year.

At current levels, Ulta trades at about 30.7 times earnings and approximately 24.5 times forward earnings. According to YCharts, Ulta's five-year average price-to-earnings ratio is 35.15, which shows that it is trading well below its historical average. I believe a fair multiple for 2014 is 32, discounted for the dismal fourth quarter and the lost confidence of investors. A multiple of 32 would place the price above $115 per share, an increase of approximately 23% from current levels, and this would still be 15.4% below its 52-week high. I believe a 23% gain will suffice to outperform the overall market in 2014, a conservative outlook based on what the company could actually do.

The French giant agrees
Sephora, the largest fragrance and cosmetics company in the world, agrees with analysts that the beauty industry will gain ground in 2014. The company is the market leader in France, Italy, and Russia, and has growing presences in China, Latin America, and the Middle East. Sephora is owned by Louis Vuitton Moet Hennessy (NASDAQOTH:LVMUY) and currently operates 1,413 locations, a number Ulta could reach one day.

Screen Shot

Sephora could be seen as a direct and growing threat to the success of Ulta, but it is focused on expansion elsewhere right now. In Louis Vuitton's recent release, it stated that Sephora is "accelerating its expansion in China... and is strengthening its presence in its new markets of Southeast Asia, Latin America and the Middle East." Meanwhile, Ulta will continue its expansion throughout the United States and the two can grow in harmony. However, if Sephora sets its sights on rapid U.S. expansion, we would have a much tougher situation.

The Foolish bottom line
Ulta is an American giant that consumers have been flocking to for all of their beauty needs. It has grown its store count to 664 and this number could easily surpass 750 by the conclusion of 2014. I believe Ulta will get back on top of its game following the fourth quarter of 2013 and push much higher in 2014; in doing so, it will be the top performer in its industry and outperform the overall market. Watch this one closely and consider adding it to your portfolio. 

Looking for more great stock picks?
There’s a huge difference between a good stock, and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Joseph Solitro owns shares of Ulta Salon, Cosmetics & Fragrance. The Motley Fool recommends Ulta Salon, Cosmetics & Fragrance. The Motley Fool owns shares of Ulta Salon, Cosmetics & Fragrance. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers