ULTA Beauty Inc. is experiencing significant P/E compression, which has led to a notable divergence between shareholder returns and cumulative EPS growth. Despite a remarkable +234.5% shareholder return, this figure is trading at over a 57% discount relative to its cumulative EPS growth. This scenario is indicative of a significant contraction in the Price-to-Earnings (P/E) ratio.
Current P/E Compression
ULTA’s current P/E ratio stands at just 12.4x its FY 2024 estimate, compared to a 10-year average P/E of 25.2x. This stark difference highlights how the stock is trading at a discount relative to its historical average. Such P/E compression often occurs in response to market conditions or investor sentiment rather than changes in the company’s fundamental performance. For investors, this presents an opportunity to acquire a high-quality growth stock at a discount compared to historical norms and current market multiples.
Market Position and Volatility
ULTA’s Beta (volatility quotient) is higher than average, which is a double-edged sword. While this volatility can be a risk, it also offers the potential for substantial gains, especially when purchasing near multi-year lows. The stock’s higher Beta indicates that its price could rebound sharply once market conditions improve, making it a compelling opportunity for those willing to tolerate some risk for potentially significant rewards.
Valuation and Future Potential
If ULTA’s stock does not return to its historical average P/E of 25.2x but instead stabilizes around a more conservative 18x forward earnings, the stock could rebound to approximately $517 per share by January 2026. This projection implies over 62% upside from its August 12, 2024, closing price. Such a forecast considers a conservative approach to valuation but acknowledges that the stock’s potential return could be substantial.
Historically, ULTA has seen significant price peaks, with the stock topping out at $556.80 in May 2023 and exceeding $574 in March of the same year. This indicates that the stock has the potential to reach higher valuations in favorable market conditions.
Historical Buying Opportunities
Looking at historical performance, ULTA’s previous “best buying opportunities” occurred when its P/E ratios ranged from 13.8x to 24.2x. Each of these instances led to substantial tradable rallies, suggesting that current levels may represent a favorable entry point. Conversely, the stock’s “should have sold” moments occurred when the P/E ratios were between 21.4x and 30.1x, highlighting that higher valuations were associated with less favorable returns.