Ulta Salon's Stellar Run Will End Soon

I have been bullish on Ulta Salon (ULTA) for over a year now. I penned down my first bullish piece back in July 2015 and the stock has returned over 70% profits since then. While I still think Ulta Salon is a great company, I think it is now time for investors to sell the stock.

I think Ulta Salon’s run up may have gone too far and it is time for investors to sell the stock and book profits. Ulta Salon has posted about 20% growth annually for the past two years, which was great considering the stock’s valuation back then.
However, Ulta Salon is now trading at 50x P/E ratio and it will be very difficult for the company to justify such a lofty valuation.

Ulta Salon is expected to post its quarterly earnings this month. As per Yahoo! Finance, analysts are expecting Ulta Salon to report revenue growth of 20% on a year over year basis to $1.06 billion. On the earnings front, Ulta Salon’s EPS is expected to jump from $1.15 last year to $1.39 this year.

The strong earnings growth will bring Ulta Salon’s P/E down by a bit, but the stock will still be overvalued. Granted the company’s 20%+ revenue growth streak has been commendable, however at a P/E of nearly 50, it should be reporting at least 35% sales growth.

Hence, I think investors should sell the stock and book profits as upside at these levels is pretty limited.
Ulta Salon
Image by kaleido-dp / Pixabay
The risk/reward ratio is not favorable for long-term investors at this point in time. Although the stock may move higher on the back of another earnings beat, but I still expect Ulta Salon to move lower or stay flat until it grows into its current valuation.

That being said, Ulta Salon’s valuation is not at a historic high. The 5-year P/E high of Ulta Salon is almost 53, which signifies the fact that the stock has always been expensive. Ulta Salon also has a tendency to continue moving higher despite its valuation.

However, I think its run may soon be coming to an end. Moreover, its 5-year valuation high is just 5% higher than its current valuation, indicating there isn’t any significant margin of safety at this point in time. Thus, I think Ulta Salon is a sell at current levels. Investors looking to buy into the stock should wait for a significant pullback to enter the stock.

Disclosure: No Position
Published on Aug 18, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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