Berkshire Hathaway, led by Warren Buffett, has recently initiated a position in Ulta Beauty (ULTA), purchasing approximately 690,000 shares valued at $266.3 million. Should I be following this trade? Let's look into Ulta Beauty’s investment moat, intrinsic value based on discounted cash flow (DCF), analyst forecasts, current share price, and margin of safety.
Investment Moat
Ulta Beauty possesses several competitive advantages that constitute its investment moat:
- Strong Brand Recognition: Ulta Beauty is a well-known brand in the beauty retail industry, offering a wide range of products from mass-market to prestige brands.
- Exclusive Product Offerings: The company has exclusive partnerships with various beauty brands, providing unique products that cannot be found elsewhere.
- Loyalty Program: Ulta’s loyalty program, Ultamate Rewards, boasts over 30 million members, driving repeat sales and customer retention.
- Omnichannel Experience: Ulta seamlessly integrates its physical stores with its digital platform, enhancing customer convenience and engagement.
- Diverse Product Mix: Ulta offers a broad range of products, including cosmetics, skincare, haircare, and fragrances, catering to a wide customer base.
Intrinsic value based on Free Cash Flow (FCF) estimate for Ulta Beauty with the following assumptions.
- Next 5 years with a conservative growth rate of 5% per year.
- Weighted Average Cost of Capital (WACC) of 8%.
- Assume a perpetual growth rate of 2% beyond 2028.
Intrinsic Value per Share = $335.81
Comparison with Current Share Price
As of the latest data, Ulta Beauty's share price is around $377.23. This suggests that the stock is trading slightly above its intrinsic value based on this DCF analysis.
Analyst Forecasts
Analysts have a positive outlook on ULTA on the average. The average analyst price target for ULTA is $495.43, with a high forecast of $690 and a low forecast of $325.
Given current share price is higher than intrinsic value based on DCF, I need to be patient and wait for opportunity to present sufficient margin of safety.
Please DOYDD.
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