Why Buying Ulta Stock on the Coronavirus Dip Makes Sense

Alongside the rest of the market, the shares of U.S. cosmetics retailer Ulta (NASDAQ:ULTA) have plunged on concerns that the rapidly spreading  outbreak of the coronavirus from China will significantly impact economic growth in the U.S. Ulta stock has fallen about 20% from its February highs on coronavirus-related concerns.

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In plain terms, these concerns are overstated, and this selloff is overdone.

Ulta is relatively isolated from fallout from the coronavirus. It won’t suffer significant supply chain disruptions, since most of the beauty industry’s factories are located in North America, where factories by and large remain open and are operating at full capacity. And all of Ulta’s stores are in America, where the outbreak is relatively contained and consumer behaviors haven’t changed all that much.

Sure, there’s a risk that the outbreak will get much worse in the U.S. But the chances of that happening are very slim. So, realistically speaking, Ulta is insulated from the coronavirus crisis.

At the same time, concerns about the coronavirus  have made the valuation of Ulta stock attractive. Assuming things go back to normal within the next few months, the shares can climb significantly by the end of 2020.

All in all, I think buying the dip of Ulta’s shares at this point makes a ton of sense.

Ulta Is Insulated From Coronavirus

The coronavirus outbreak is a big, complicated, scary, and volatile thing. But it’s just an epidemic and like all other epidemics before it, it, too, shall pass, and it won’t inflict much damage before it does.

Just look at China. The coronavirus outbreak started there in December. About two months later, the outbreak is essentially dead, with the number of active cases rapidly dropping, the number of new cases being reported each day falling closer and closer to zero, and the number of recoveries skyrocketing. All in all, the virus infected about 0.005% of China’s total population, lasted just two months, and killed less people over those two months (3,000) than cancer kills every week in the U.S. alone (more than 10,000).

And that’s where the outbreak was the worst. The U.S. will get hit far less because it’s not the epicenter of the virus, has far better healthcare infrastructure, and will be assisted by warmer weather later in March and in April.

So let’s not act like coronavirus is the end of the world. It’s not. It’s just a minor outbreak that will cause some social distancing in the U.S. for a few weeks, cause a few events to be cancelled, and reduce travel.

None of those developments will hurt Ulta. All of the company’s stores are in the U.S. Domestic consumers won’t materially change their habits because of the outbreak. Any changes in Americans’ behavior will be short-lived. At the same time, most of the supply chain of beauty stores is in North America, where factories are still open and fully operational.

Ulta won’t suffer any supply chain problems or meaningful reductions in its store traffic, so its stock shouldn’t be down 20%.

Ulta Stock is Undervalued

None of those developments will hurt Ulta. All of the company’s stores are in the U.S. Domestic consumers won’t materially change their habits because of the outbreak. Any changes in Americans’ behavior will be short-lived. At the same time, most of the supply chain of beauty stores is in North America, where factories are still open and fully operational.

Ulta won’t suffer any supply chain problems or meaningful reductions in its store traffic, so its stock shouldn’t be down 14%.

Ulta Stock Is Undervalued

If coronavirus fears fade over the next few weeks — as they should — then Ulta stock is attractively positioned to rip higher from its current levels.

Ulta is the de facto leader of the retail cosmetics sector. There was some concern that the company’s dominance would be threatened by department stores more aggressively entering the beauty market. But Ulta responded to those competitive threats by forging exclusive partnerships with the market’s hottest direct-to-consumer beauty brands like Kylie Jenner’s KYLIE Cosmetics.

These exclusive partnerships have given Ulta a competitive advantage in the beauty sector which has steady demand trends. As a result, the company has been able to maintain its dominance of the cosmetics market. This dominance, coupled with new retail store openings, have paved the path for the company to keep growing its revenue at a healthy clip for the next several years.

Ulta’s profit margins, however, are under pressure. The company is investing a large amount of money in store remodeling and e-commerce improvements. Such investments will fuel continued top-line growth by the company. Eventually, they will lead to increased profitability. The company’s profit margins should consequently hold up in the long run.

All in all, I expect Ulta’s revenue to increase by close to 10% annually over the next few years. Some margin expansion plus share buybacks should fuel double-digit-percentage profit growth.

ULTA stock trades at 19.6 times analysts’ average 2020 earnings per share estimate. That’s a pretty cheap multiple for a company whose earnings are growing by double-digit-percentage levels. It’s also as cheap as this stock has been in a long, long time. So, once investors’ sentiment improves, the shares should fly higher.

The Bottom Line

I recommend buying Ulta’s shares on the coronavirus dip. This is a solid company which is relatively insulated from the outbreak. That outbreak also won’t last much longer. And shares are as cheaply valued as they’ve been in a long time.

ULTA stock should weather the market’s current turbulence. And once the fears about coronavirus fade, the shares should bounce back in a big way.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.


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