Ulta Beauty (ULTA) shares rose 11% after news broke that Warren Buffett’s Berkshire Hathaway ($BRK.B) had invested in the company. If you feel like you’ve missed the boat, don’t worry, because it’s not too late to invest in Buffett’s latest pick. While the $266 million stake is a small bet for Berkshire, which represents just 0.1% of its public stock portfolio, it shows that Buffett (or one of his trusted associates) sees value in the company.
Buffett is widely regarded as one of the greatest investors of all time, so it’s typical that stock prices soar when news breaks that “the Oracle of Omaha” has taken a position. This time was no different when Berkshire filed its second-quarter 13F, and Ulta shares reacted accordingly.
I’m bullish on the $18.4 billion beauty retailer, not only because of Buffett’s backing, but also because of its cheap valuation, strong track record of sales growth and impressive margins for a retailer. In addition, Wall Street analysts see significant upside potential in Ulta.
What is Ulta Beauty?
Founded in 1990, Ulta Beauty is a retailer of cosmetics, beauty and skin care products, and more. The company’s stores also offer salon services. It is an omnichannel retailer with both physical and online presence. There are currently 1,421 Ulta Beauty locations in the United States and the company plans to expand to Mexico in 2025.
Nice review
It’s probably not too late to buy Ulta, as shares are still quite cheap, even when factoring in the inevitable Berkshire-induced run-up. Ulta’s fiscal year ends in January, and with the company expected to earn $25.68 per share this year, the company trades at just 14.7 times those consensus estimates.
This is considerably cheaper than the broader market – the S&P 500 (SPX) trades at 24.2 times earnings – so it’s easy to see why a value investor like Buffett was attracted to the stock.
And when you look at fiscal 2026, Ulta shares are even cheaper, trading at just 13.4 times consensus estimates that call for the company to earn $28.19 per share.
Ulta’s value is more than just superficial
Ulta’s shares had fallen sharply when the company missed and revised downward its forecasts earlier this year. The company faces increasing competition from Sephora, which is opening more stores in Kohl’s department stores (KSS) soon, and from online retail giant Amazon (AMZN), which is increasingly collaborating with well-known beauty and cosmetics brands.
But the sell-off seems exaggerated. The Wall Street JournalBefore the Berkshire news broke, shares had lost about 42% of their value since the March announcement. Even after the post-Buffett rally, shares are still down 23% year-to-date, while the S&P 500 is up 16.5% year-to-date, so Ulta still has plenty of room to “catch up” to the broader market.
And the company is doing a lot of things right. Sales have grown at a compound annual growth rate (CAGR) of 11% over the past five years, and its operating margins are about twice those of the average retailer in the S&P 500. At the same time, they are on par with TJX (TJX), which is widely considered one of the best in the industry.
Moreover, Ulta’s average return on investment (ROI) of an impressive 26% over the past five years even surpasses that of the mighty Costco (COST), which averaged 18%.
And while Ulta isn’t a dividend stock, it still returns a lot of capital to shareholders. The company has set a goal of buying back $1 billion worth of stock this year. This can also be seen as a sign that Ulta’s management agrees with Buffett that the stock is undervalued.
Finally, the company has a strong balance sheet, so there are no concerns about debt.
Is ULTA stock a buy according to analysts?
On Wall Street, ULTA receives a Moderate Buy consensus rating based on 10 Buy, seven Hold, and one Sell ratings over the past three months. The average price target for ULTA stock of $467.82 implies an upside potential of 24.1% from current levels.
View more ULTA analyst ratings
Beauty in the eye of the beholder
Ulta Beauty shares got a nice boost when Berkshire Hathaway’s latest 13F revealed that the iconic company had invested in the beauty and cosmetics retailer. But even after the good run, shares still look downright cheap, trading at just 14.7 times January 2025 earnings estimates.
I’m bullish on Ulta shares because Buffett supports it, offers this cheap valuation, and the stock has a history of strong growth and impressive margins. Patient investors who invest alongside Buffett will likely be rewarded as they see value in this top-tier retailer.
notice
