Ulta Salon: Great Prices For Consumers, Great Value For Investors

As the market hovers around all-time highs, it is not always easy to find new investments and the search can be very agonizing. However, some of the largest companies in the U.S. have been falling hard, and Ulta Salon, Cosmetics, & Fragrance (ULTA -2.73%) is arguably the weakest of all. Let's take a look at what is going on within the company and decide if this is our opportunity to buy.

The U.S. beauty retailer
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.

Source: Ulta

The drop-off
All was going well for Ulta until it released third-quarter results on Dec. 5; the results 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 on revenue of $853 million-$867 million when analysts expected $1.24 per share on revenue of $895 million. After this dismal announcement, Ulta's stock was hit hard; it dropped over 18% after-hours and closed down 20.54% in the trading session that followed, but the weakness has continued for several weeks.

Source: Yahoo! Finance

Is it inexpensive or a deathtrap?
Today, Ulta is more than 38% below its 52-week high, reflecting the intense negativity it faces. However, Ulta trades at just 27.4 times its trailing EPS of $3.05 and 21.9 times 2014's full-year EPS estimate of $3.81; to compare, the stock has a five-year average price-to-earnings multiple of 35.4, which means it is trading at a steep discount.

The promotional holiday season has killed Ulta and just about every other retailer in the market; however, expansion and earnings growth are still in Ulta's future, so I believe a fair multiple for its stock is 32. A multiple of 32 would place Ulta's shares upwards of $120, which is still well below its 52-week high but a strong 46% rise from current levels.

Competition: an added plus?
It is not often that you find a company who actually looks twice as good when you compare it to its competitors, but that is exactly the situation for Ulta. Sally Beauty (SBH 0.38%) and Regis (RGS -1.58%) are two of Ulta's largest competitors, but neither seem to have an edge or ability to compete. This opinion is supported by the most recent earnings report from each company; take a look at this:

The numbers do not lie and clearly showing that Ulta is the top dog in the beauty and salon industry. I believe Sally and Regis are untouchable in the market today and both need to make major moves to be able to continue competing in the marketplace. It is always best to follow the consumer when it comes to the beauty products and services industry, and consumers are shopping at Ulta.

The Foolish bottom line
Ulta was one of the best growth stories in the market for years and I think investors and analysts will get back on its side within a short period of time. The expansion plans are still in place and earnings will likely get back on track following the promotional fourth-quarter environment, so investors must continue to look at the long-term potential. The negativity around Ulta has been strong, but investors should pick the price they believe is much too cheap to resist, and pull the trigger if it reaches that level.