Ulta Beauty Stock Gains Steam, Jim Cramer Says ‘Buy’

  • Ulta Beauty stock is down 24% since the company announced lower-than-expected second-quarter results in late August.
  • Jim Cramer suggests buying ULTA stock.

CNBC’s Jim Cramer is optimistic about Ulta Beauty (ULTA) stock, and suggests “buy.” The stock plunged nearly 31% after the company released lower-than-expected second-quarter results on August 29. However, ULTA stock has recovered by about 13% in the last nine trading days, making it 24% lower since the company’s earnings announcement.

Ulta stock’s recent uptick was due to insider buying. Ulta director Charles Heilbronn bought its stock in a series of transactions between September 26 and 30. Cramer thinks such insider buying suggests the stock could move up. ULTA stock’s valuation is also cheaper than peers’, further supporting its “buy” case.

Is it time to buy ULTA stock?

Ulta Beauty’s problem is its high reliance on cosmetics, a business experiencing headwinds in North America. Management stated that its makeup segment was downtrending at the end of the second quarter. Anticipating challenges in its makeup business, Ulta Beauty reduced its fiscal 2019 revenue and earnings guidance. It is now emphasizing its in-demand skincare products to offset the weakness in its cosmetics business.

The company has lowered its fiscal 2019 revenue growth guidance to 9%–12% from its previously anticipated low double-digit percent rate. It’s reduced its EPS forecast to $11.86–$12.06 from $12.83–$13.03.

The company’s guidance cut and challenges in its largest revenue segment irked investors. However, Ulta stock’s downside seems limited, given its considerable recent decline. Any pullback could provide a buying opportunity.

The company’s low valuation and projected 9%–12% sales growth and 8%–10% EPS growth make its stock appealing. However, makeup sales headwinds could continue to limit the stock’s near-term upside. Analysts’ price target of $291.71 for ULTA implies a 13.3% upside based on its closing price of $257.43 yesterday.

ULTA stock’s forward PE multiple is 20.6x, lower than Estée Lauder’s (EL) 30.3x. EL’s premium valuation seems justified, as it derives a significant portion of its revenue (about 44%) from skincare products, for which demand is strong. Moreover, Estée Lauder has exceeded analysts’ revenue expectations over the past several quarters, and its bottom line has grown at a robust double-digit percent rate.