Why Warren Buffett Bought ULTA Beauty Stock!

Summary

Investor Warren Buffett's recent purchase of 690,000 shares in Ulta Beauty has sparked renewed interest in the company, despite its stock price decline due to recession fears. Despite its current 12% after-hours surge, the stock remains undervalued with a 38% return on equity, no debt, and a strong loyalty program. The company's venture capital fund, Prisma Ventures, and its steady revenue and earnings growth suggest a resilient business poised for a rebound, potentially offering investors a compelling buying opportunity.

Takeaways

• 📈 Warren Buffett recently bought 690,000 shares of Ulta Beauty, signaling confidence in the company despite its stock price decline.
• 📉 The stock has been underperforming, with the speaker mentioning it was discussed when at $430 and now trading around $330, reflecting market concerns over a recession.
• 💡 After Buffett's investment was disclosed, Ulta Beauty's stock rose 12% in after-hours trading, suggesting a potential positive market reaction to the news.
• 💸 The company has strong financials with a 38% return on invested capital, 12 times earnings, no debt, and a significant cash position of $524 million.
• 🛍️ Ulta Beauty offers both products and services, which gives it a competitive edge against online retailers like Amazon.
• 🌐 The company has a loyal customer base, with over 95% of purchases coming from loyalty or reward members.
• 💼 Ulta Beauty has a venture capital fund, Prisma Ventures, which invests in early-stage companies focusing on beauty and AI innovations.
• 📊 Despite market fears, Ulta Beauty has not reported a decline in revenues and continues to post increased guidance and revenues.
• 📉 The stock's decline is attributed to investor expectations of bad earnings due to a potential recession, rather than actual poor performance.
• 💹 The company's free cash flow yield is around 7%, indicating a potentially undervalued stock with a strong cash-generating capability.
• 🚀 The speaker believes that the stock is still a buy, with a historical average P/E of 25 times, compared to the current 14.2 times after the stock's rise.

Q & A

What significant action did Warren Buffett take regarding Ulta Beauty stock?

Warren Buffett bought 690,000 shares of Ulta Beauty stock, as disclosed in his latest 13F filing.

How has Ulta Beauty's stock performance been historically according to the script?

Historically, Ulta Beauty's stock has traded at an average P/E ratio of 25 times earnings, and as high as 42 times, making the current P/E ratio of around 14.2 times earnings seem undervalued.

What is the current situation of Ulta Beauty's stock price after Warren Buffett's investment was disclosed?

The stock price of Ulta Beauty went up by 12% in after-hours trading to $360.9 after Buffett's investment was disclosed.

What is the current financial health of Ulta Beauty according to the script?

Ulta Beauty has a strong financial position with no debt, a 38% return on invested capital, and a market price significantly lower than its historical valuations.

Why has Ulta Beauty's stock been declining despite positive earnings?

The stock has been declining due to investor expectations of a recession and the belief that the company will report bad earnings in the future, even though the company has not yet reported a decline in revenues.

What services does Ulta Beauty offer that differentiates it from online retailers like Amazon?

Ulta Beauty offers not only beauty products but also services such as hair styling, which attracts customers to visit their physical stores, giving them a competitive edge over online retailers.

What is Prisma Ventures and how is it related to Ulta Beauty?

Prisma Ventures is a venture capital fund of about 300 million dollars associated with Ulta Beauty, which invests in early-stage companies, particularly those innovating within the beauty industry and utilizing AI technology.

How has Ulta Beauty's revenue and earnings per share (EPS) been performing recently?

Despite the stock's decline, Ulta Beauty has been increasing its revenue and EPS, with a steady growth over the years and a recent slight increase in comparable sales.

What is the current free cash flow yield of Ulta Beauty and what does it indicate about the company?

The current free cash flow yield of Ulta Beauty is around 7%, which is high considering the company has no debt and is still growing, indicating a potentially good investment opportunity.

What is the script's perspective on the future of Ulta Beauty's stock price?

The script suggests that the stock is undervalued and believes that it could see a return to higher P/E ratios once recession fears subside, potentially leading to significant returns for investors.

What advice does the script give regarding investing in Ulta Beauty's stock?

The script advises that investors should not buy the stock solely because Warren Buffett has invested, but rather because they have done their research and believe in the company's fundamentals.

Outlines

00:00

📈 Warren Buffett's Ulta Beauty Investment

In this paragraph, the speaker discusses Warren Buffett's recent purchase of 690,000 shares of Ulta Beauty, despite the stock's decline from its previous highs. The speaker highlights the stock's current valuation, noting its low price-to-earnings ratio, lack of debt, and strong return on invested capital. They also mention the company's continued revenue growth and positive guidance, suggesting that the market's pessimism may be overblown. The speaker believes Ulta Beauty is undervalued and remains a buy, even after Buffett's investment, which has caused a 12% increase in the stock price after hours.

05:02

💡 Ulta Beauty's Financial Strengths and Future Prospects

The second paragraph delves into Ulta Beauty's financial health, emphasizing its strong free cash flow yield, no debt, and substantial cash reserves. The speaker also discusses the company's venture capital fund, Prisma Ventures, which invests in beauty-related innovation, particularly AI. They argue that despite concerns of a recession affecting the company's performance, Ulta Beauty's fundamentals remain solid, with a history of revenue and earnings per share growth. The speaker projects modest revenue growth and a potential return to higher valuation multiples once recession fears subside. They conclude by cautioning that investment should be based on individual research and belief in a company's fundamentals, rather than solely on the actions of high-profile investors like Warren Buffett.

Keywords

💡Warren Buffett

Warren Buffett is a renowned American investor and business tycoon, known for his value investing approach and being the chairman and largest shareholder of Berkshire Hathaway. In the context of the video, his recent purchase of 690,000 shares in Ulta Beauty is highlighted as a significant event that could influence the stock's performance and investor sentiment.

💡Ulta Beauty

Ulta Beauty is a prominent American beauty retailer that offers a wide range of cosmetics, fragrances, haircare products, and salon services. The company's stock and its recent performance are the central focus of the video, with discussions on its valuation, market perception, and potential for growth.

💡Stock

A stock represents a share in the ownership of a company and the right to a proportion of its assets and earnings. In the video, the term is used to discuss the investment potential of Ulta Beauty's stock, its current trading price, and the impact of Warren Buffett's investment on its value.

💡After Hours Trading

After hours trading refers to the buying and selling of stocks outside of the regular market hours. The video mentions that Ulta Beauty's stock rose by 12% in after-hours trading following the news of Warren Buffett's investment, indicating a positive immediate market reaction.

💡Undervalued

An undervalued stock is one that is believed to be trading for less than its true or fair value. The video suggests that Ulta Beauty's stock is undervalued, implying that it may be a good investment opportunity due to its perceived low price relative to its financial fundamentals.

💡Recession

A recession is a period of economic decline, typically characterized by a fall in GDP, high unemployment, and reduced consumer spending. The video discusses investor fears of a recession as a reason for Ulta Beauty's stock price decline, despite the company's positive financial performance.

💡Revenue Growth

Revenue growth refers to an increase in the income generated by a company over time. The video highlights Ulta Beauty's consistent revenue growth and positive comparable sales as indicators of the company's health and potential for future success.

💡Free Cash Flow (FCF)

Free cash flow is the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. The video mentions a 7% free cash flow yield for Ulta Beauty, suggesting the company generates substantial cash that could be returned to investors or used for growth.

💡Debt

Debt refers to an obligation that an entity owes to another entity, often requiring repayment with interest. The video points out that Ulta Beauty has no debt, which is a positive financial indicator as it reduces financial risk and interest payments.

💡Multiple Expansion

Multiple expansion occurs when a stock's price-to-earnings (P/E) ratio increases, often due to market optimism or improved company performance. The video suggests that Ulta Beauty's P/E ratio could expand from its current level of around 14 times earnings, potentially leading to capital gains for investors.

💡Investment Thesis

An investment thesis is a set of reasons and logical arguments supporting a particular investment decision. The video outlines the presenter's investment thesis for Ulta Beauty, based on its financial performance, market position, and potential for growth, despite current market fears.

Highlights

Warren Buffett has purchased 690,000 shares of Ulta Beauty stock, which is a notable investment despite being a small portion of his portfolio.

The investment has led to a 12% increase in Ulta Beauty's stock price after Buffett's position was disclosed.

The speaker believes Ulta Beauty's stock is still undervalued and represents a buying opportunity.

Ulta Beauty's stock is down 32% on the year, despite no decline in revenues and continued revenue growth.

The market's negative reaction is attributed to recession fears and anticipated bad earnings, rather than actual performance.

Ulta Beauty offers both beauty products and services, which helps them compete with online retailers like Amazon.

The company has a loyal customer base, with over 95% of purchases coming from loyalty or reward members.

Ulta Beauty has a venture capital fund, Prisma Ventures, which invests in early-stage companies in the beauty and AI sectors.

The company's financial health is strong, with $524 million in cash, no debt, and a 7% free cash flow yield.

Despite market concerns, the company continues to post positive revenue growth and has not yet reported a decline.

The speaker doubts that Ulta Beauty will revise their earnings per share estimate lower due to their strong balance sheet.

The stock is trading at 14.2 times earnings after a 12% increase, which is considered a good value.

Historical average earnings for Ulta Beauty were 25 times, with a high of 42 times, making the current valuation attractive.

The company's revenue growth is expected to be around 3% for the fiscal year 2025, based on guidance.

Ulta Beauty is expanding into Mexico, which could potentially boost revenue growth.

The speaker expects an annual return of around 12% on the stock, even in a worst-case scenario, excluding multiple expansion.

The stock's current PE ratio is around 14 times, which is low compared to historical averages and could expand post-recession.

The speaker emphasizes that investment decisions should be based on research and belief in a company, not solely on Buffett's actions.

Transcripts

Warren Buffett bought Ulta beauty stock

as of his latest 13 app filing he did

buy 690,000 shares maybe it's not much

for his hundreds of millions of dollar

portfolio but it's very encouraging as

this is a stock I talked about a lot on

the channel and it's one of my worst

calls ever like I talk about it and it

keeps going down and it keeps going down

I talked about it when it was like 430

or 420 and now it's tring at 330 the

stock is up 12% in the after hours to

360 9 after Warren Buffett disclosed his

position I'm not sure if this is going

to be sustainable or not but I

personally believe the stock is still

cheap it's still undervalued I se the

stock is still a buy so if you're

thinking of maybe you know taking warm

Buffett's idea and following him maybe I

don't think it's late I don't think it's

a bad idea at all I'm going to give you

a quick update and tell you why I still

believe in the company and what do I

think about it in general all right now

for Ulta beauty yes now it's up around

12% in the after hours but the stock is

still down 32% on the year just m

massive mind-blowing 38% return on vest

Capital 12 times earnings and no debt

and the stock keeps going down not

because they reported bad earnings but

because investors are expecting bad

earnings because people believe we're

going to have a recession the company

has yet to decline in revenues they're

still posting increase in guidance

increase in revenues but the market

doesn't like it and they believe the

market believes it's going to report bad

earnings and it hasn't even reported yet

so a lot of that stuff in my opinion

it's priced in as long as it doesn't

disappoint in a major way I think is a

lot of that stuff is priced in the stock

or the company a lot of you are familiar

with it they sell beauty products and

stores online but they also have

services like you know a lot of people

go there get their hair done and other

things a lot of Ulta beauty does have

these stuff and this is mainly how they

somehow compete with Amazon cuz I know

you could buy a lot of the makeup stuff

and Hair Care stuff on Amazon a lot of

people still choose to go there maybe

they have their hair stylist over there

and they do both things you really can't

do your hair online and a lot of people

goes there and this is one of their

advantage and they do have some kind of

a cult following where a lot of the

people that go there they just keep

going there they love it over 95% of

their purchases are from like you know

loyalty or reward members and people

love to collect points and then get gift

cards or whatever they get and some I

forget to mention on my YouTube videos

is they have a fund it's like a venture

capital fund around I believe 300

million and it's called Prisma Ventures

you could look it up Prisma Ventures and

they do invest in early stage companies

that do a lot of innovation within

Beauty mainly a lot of stuff in AI like

they have this Precision lash it's like

a robot that does lashes and other kind

of AI stuff you know I always joke how

the CEO pretty much never talks about it

on the call and if he mentioned AI a

little bit more especially a few months

ago maybe the stock would be sitting at

$600 but they do have a lot of different

Investments and a lot of them could

potentially play out again this is not a

dying company if you look at the start

you believe it's a dying company but

it's not a dying company at all the

company has been increasing revenue and

steadily earnings per share more than

double from 2019 and they've been

increasing it except Co of course and

things have been going very well for the

company in terms of the last quarter the

company is still growing again it's only

1.6% grow in terms of comparable sales

although they're comparing to a peak

period of 2023 and they're still growing

it's not here the recession is not here

yet maybe it's coming maybe things are

slowing down yes but so far a lot of

retailers have been declining in

revenues and in comparable sales and

Ulta is still putting up positive

numbers yet the stock is going down and

they did revise guidance a little bit

lower but they're still expecting 2 to

3% grow again no declines is still

growing earnings per share slightly

lower and and things are still fine so

flattish to positive and the stock is

still going down because of recession

fears and investors believe they're

going to revise guidance down again and

we're going to have a recession and

maybe this is true but I highly doubt

they're going to revise down the

earnings per share estimate again

because they likely been buying back so

much stock at these prices the company

has an amazing balance sheet they have

$524 million of cash which which is high

relative to the market cap and they have

no debt no debt at all they can borrow

even money and do a lot of buy bags or

they have the free cash flow the free

cash flow yeld right now is around 7% 7%

free cash flow yield guys and they have

no debts they have no dividend so I'm

sure they bought back a lot of stock and

I highly doubt they're going to revise

the EPS estimate lower maybe comparable

sales a little bit and even now I doubt

it somehow you know I just doubt it I

just don't saying it's going to happen

but but it's possible if you look at

everything else in terms of Gap earnings

I did say the stock is trading at 12

times earnings and this is true but the

stock is up 12% in after hours so

adjusted to the 12% increase the stock

right now is trading around 14.2 times

earnings and 14.2 times earnings is not

expensive at all on on historical

average historical average was 25 times

it traded as high as 42 times and now

it's trading around 14.2 times so around

here and if you look at it historically

this has been an amazing time to be

buying Ulta Bey stock and it's not

expensive at all 14 times is not

expensive around 6 and a half% free cash

yield for a company with no debt that's

still growing and maybe if they decline

this year next year is going to be

easier to beat on comparable sales and

it's going to be much much better and

War Buffett did open a position but in

terms of how I think about the returns

of the stock you know I'm looking at in

terms of Revenue growth Revenue growth

they used to grow revenues 20 21% before

Co after Co they grew 40% 18% 10% now

this is fiscal year 2025 so we're in

2025 even though it's in 2024 so you

have to look at the 2025 year for 2025

expected around 3% based on their

guidance and from there it's like 5 to

6% and it could be a little bit faster

because now the company is expanding

into Mexico through a joint venture

partner so maybe Mexico is going to

bring in a lot of Revenue grow as a lot

of people in Mexico are likely familiar

from Ulta Beauty in the United States

that could be huge for them but even if

that doesn't happen and it wasn't this

successful I could easily see you know

6% Revenue grow so if we're getting 6%

Revenue grow and 6 and a half% free

Capal yield I would say this is around

the 12% annual return on the stock and

this is like the worst case scenario to

me and the company still has no debt and

this is excluding a multiple expansion

as I said the PE right now is around 14

times earnings now I wouldn't be shocked

after this whole recession drama is over

if Ulta doesn't go back to you know 15

16 17 times earnings I wouldn't be

shocked last year the same thing

happened and I owned the stock I bought

it at 14 times earnings the stock went

to like 20 times 21 times earning within

four months the stock was up like 40% in

4 months or something crazy and it came

back down so after the recession fears

are over and we stop talking about that

stuff next year I wouldn't be surprised

if the stock goes back to 17 times 18

times earnings that's what I personally

think so for me personally the stock is

a buy because the fundamentals are right

not because waren Buffett bought it you

know I just want to give a quick

disclaimer that if Buffett buys a stock

it doesn't mean it's going to go up I

mean look at Paramount Paramount is down

31% he took a loss on Paramount you know

he took a loss on airlines before so we

all make mistakes and you shouldn't buy

a stock because Buffet bought it you

should buy a stock because you did your

research and because you believe in a

company and this is all I have to say

you know it was a financial advice just

my opinion thank you guys for watching I

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