Return on invested capital (ROIC) may be my favorite metric when looking for stocks with the ability to create lasting generational wealth. It measures a company's profitability compared to its debt and equity, and typically highlights the degree to which its management is able to effectively invest its capital in money-making projects.
Stocks that generate a high ROIC have handily outperformed their lower-ranked peers since 2003 and are at an advantage to continue doing so in the future. Two stocks that fit this high-ROIC framework are energy drink maker Celsius (CELH +2.04%) and beauty products retailer Ulta Beauty (ULTA 14.33%).
However, in addition to the high profitability that Celsius and Ulta Beauty bring to the table, their share prices are down 66% and 34%, respectively, from their 52-week highs. Here's why that combination of circumstances makes now the perfect time to buy these two businesses.
Celsius's growth story isn't actually over
Though its share price rose by more than 7,000% between 2019 and early 2024, Celsius has plummeted in recent months by roughly 66% following a dramatic slowdown in its sales growth rates. After that plunge, it's now up by around 2,700% since the beginning of 2019.
NASDAQ: CELH
Key Data Points
While Celsius averaged 94% sales growth annually over the last five years, its most recent quarter's mark of 23% extended the company's continued growth slowdown.
CELH Revenue (Quarterly YoY Growth) data by YCharts.
Making matters worse, analysts now believe that the company's third-quarter sales may actually drop by roughly 17% compared to last year's figures. So how exactly did this sudden potential shift to shrinking sales come to be?
- In August 2022, Pepsi partnered with Celsius and agreed to become its distributor.
- Pepsi ordered a ton of Celsius products, as the functional energy drink maker was already growing sales by more than 100% year over year at the time without Pepsi's help.
- Because Celsius records revenue when it sells its drinks to Pepsi, it continued to deliver wild growth throughout late 2022 and 2023.
- Consumer spending began tightening slightly in 2024, slowing growth across the energy drink industry.
- Pepsi realized it had ordered too much inventory from Celsius and started reducing its orders. This led Celsius management to announce that sales to its largest distributor would be down by $100 million to $120 million in the third quarter.
- Analysts slashed Celsius's Q3 revenue estimates, and the company's stock slid by 66% from the all-time high it set in early summer.
Long story short, most of this wild ride represents a timing issue. Pepsi (understandably) overprepared when it became Celsius's leading distributor and (rightfully) recalibrated its inventory further down the road.
Overall, Celsius has grown its sales by 157% since its agreement with Pepsi. But because the growth wasn't smooth, the market has reacted negatively.
However, if we set the Pepsi drama aside, it is clear that Celsius's growth story is far from over. First, scanner data (which shows what customers are actually spending on Celsius in stores) is up by 10% so far in Q3, according to market research firm Circana. Based on this scanner data growth amid a challenging consumer environment, management believes its market share has grown by a full percentage point year over year so far in Q3.
Furthermore, Celsius is expanding into Canada, the United Kingdom, Ireland, Australia, New Zealand, and France. Propelled by strong ROIC that has risen to 27% today, Celsius could unlock numerous growth opportunities if it can replicate its highly profitable domestic growth internationally.
While the company still needs to prove that its high ROIC can endure over the long haul, it already ranks above its beverage industry peers.
CELH Return on Invested Capital data by YCharts.
With international sales only accounting for 5% of the company's revenue today -- and with its sales to Pepsi on track to normalize over the longer term -- Celsius looks well positioned to create lasting generational wealth.
Ulta Beauty: Primed to exceed low expectations
Since its initial public offering in 2007, shares of specialty beauty retailer Ulta Beauty have generated total returns of 1,200%, nearly triple the returns of the S&P 500.
NASDAQ: ULTA
Key Data Points
However, Ulta's stock has slid about 34% from its 52-week highs as it struggled to lap the formidable comps it delivered amid the post-lockdown boom.
ULTA Revenue (Quarterly YoY Growth) data by YCharts.
In its latest reported quarter, Ulta's same-store sales dipped by 1%, compared to an 8% increase in the prior-year period. The primary culprit driving that slowdown was intensifying competition in the beauty industry.
"More than 80% of our stores have been impacted by one or more competitive openings in recent years," Chief Executive Officer David Kimball explained on the fiscal Q2 earnings call, "with more than half impacted by multiple competitive openings." As alarming as this sounds, however, I'm optimistic that these headwinds should prove to be temporary.
First, 95% of Ulta's sales come from its 44 million Ultamate Rewards members, which shows just how massive and loyal the company's customer base is already.
Second, according to a survey by Piper Sandler, Ulta remains the second-most-popular beauty destination among Gen Z shoppers, with 31% of votes; only LVMH-owned Sephora ranks higher at 37%. To give these figures some perspective, the two beauty brands combine to command a similar percentage of mindshare among Gen Z as TikTok and Instagram do in the social media industry.
Last, Ulta has averaged an ROIC of 29% since it went public and maintained positive free cash flow (FCF) every year as well. Generating nearly $1 billion in FCF last year alone, the company has an additional $400 million in cash on hand compared to no long-term debt. Armed with this cash, Ulta has reduced its outstanding share count by 27% over the last decade, helping to boost its FCF-per-share more than eight-fold over that time.
With the stock trading at a price-to-FCF ratio of 18 today, a reverse discounted cash flow model will show that Ulta only needs to grow its FCF by 5% annually to live up to its valuation. All in all, Ulta looks like a premium business at a fair price -- even Berkshire Hathaway and Warren Buffett seem to like it.
