Investor optimism abounds Ulta Beauty, Inc. (NASDAQ: ULTA) but growth is lacking
With a price / earnings (or “P / E”) ratio of 28.3x Ulta Beauty, Inc. (NASDAQ: ULTA) can send very bearish signals right now, given that nearly half of all companies in the United States have P / E ratios below 17x and even P / E below 10x are not unusual. Nonetheless, we’ll need to dig a little deeper to determine if there is a rational basis for the very high P / E.
Ulta Beauty has certainly been doing a good job lately as its profits have grown more than most other companies. It looks like many are expecting the strong earnings performance to persist, which pushed up the P / E. Otherwise, existing shareholders might be a little worried about the sustainability of the share price.
NasdaqGS Price: ULTA based on prior income September 20, 2021
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What do the growth indicators tell us about the high P / E?
In order to justify its P / E ratio, Ulta Beauty would need to produce exceptional growth well above that of the market.
Looking back first, we see that the company increased its earnings per share by an impressive 161% last year. The last three-year period also saw an overall 27% increase in EPS, largely aided by its short-term performance. So we can start by confirming that the company has indeed done a good job increasing its profits during this period.
Looking ahead, EPS is expected to increase 12% each year over the next three years according to analysts who follow the company. Meanwhile, the rest of the market is expected to grow by 12% per year, which is not significantly different.
In light of this, it’s curious that the P / E of Ulta Beauty is above the majority of other companies. It appears that most investors are ignoring fairly average growth expectations and are willing to pay for exposure to the stock. However, further gains will be difficult to achieve as this level of earnings growth is likely to weigh on the stock price eventually.
The last word
As a general rule, we do not recommend overinterpreting price / earnings ratios when making investment decisions, although this can reveal a lot about what other market participants think about the company.
Our review of Ultra Beauty’s analyst forecast revealed that its earnings outlook corresponding to the market is not having as much of an impact on its high P / E as we would have expected. Right now, we are uncomfortable with the relatively high share price as expected future earnings are unlikely to sustain such positive sentiment for long. This puts shareholders’ investments at risk and potential investors risk paying an unnecessary premium.
There are also other vital risk factors to consider before investing and we have discovered 1 warning sign for Ulta Beauty that you need to be aware of.
If these risks make you reconsider your opinion of Ulta Beauty, explore our interactive list of high-quality stocks to get a feel for what’s out there.
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