Is Ulta Stock BlackRock's Best Kept Secret?

Watching the positioning from the world's largest players in financial markets, such as BlackRock NYSE: BLK and Goldman Sachs Group NYSE: GS, can often pay substantial dividends when figuring out what the best minds in the business are seeing. 

Today, an outlier in retail stocks would surely interest those who like to follow Warren Buffett's thinking and strategy, which surrounds itself with finding high-quality businesses at a reasonable discount. Ulta Beauty NASDAQ: ULTA fits the profile for a perfect value investment for reasons that will become obvious in a bit.

There are reasons to believe this stock can become a 'multi-bagger' characterized by the potential to deliver returns that will compound over time, but more on that later... For now, get your pencils ready.

Well Kept Secret

BlackRock, along with Vanguard, owns roughly 19.8% of the entire company, and when these two take a bullish - long-term - view on a company, you better bet it is for a good, solid reason.

While tools used by everyday investors are no match for the resources these names have, the laws of business fundamentals are the same for everyone. 

Ulta stock has declined by as much as 28.3% from its recent highs, giving these names more of a reason to accumulate an even bigger position; why? Wall Street's definition of a bear market is a 20% - or larger - retracement from all-time or recent highs.

Interestingly, the business seems to be far away from a bear market, creating the perfect opportunity to allocate some dollars into this name.

Within the company's second-quarter earnings press release, revenues grew by 10.1% over the year. While still a good jump for a company in the retail industry, it is still far from the historical norms that the name has demonstrated.

Over the past decade, revenues have grown at a CAGR (Compounded average growth rate) of 16%, leaving today's levels with the possibility of further expansion. 

Checking the vital signs across other business drivers, such as gross margins, the past quarter showcased a 39.3% margin, which happens to be the largest in a decade (excluding 2022).

EPS also grew by 5.6% during this period, which is critical to note because, using the same CAGR logic, investors could expect management to find a way to return to the historical 27% growth levels.

All the Right Moves in Value Creation

Whether existing or still on the fence, shareholders should take their hats off to management for making all the right moves lately. By creating new alliances with Target NYSE: TGT, which by extension creates a business tie to Starbucks NASDAQ: SBUX, a cyclical immunity begins to form for Ulta.

Keeping in mind that Target stock is also encountering bear market environments, despite its business showing clear signs of recovery and expansion, investors now have a double-ended sword to uncover the market's upside potential.

Putting on your Buffett filter, one of the main things you would want to see in Ulta - aside from steady profits and margins -is how efficient they are at investing the company's capital. Highly efficient methods will directly trickle down to shareholder benefits.

Over the past decade, which reasonably includes two full business cycles for the American consumer, Ulta has achieved an average ROIC (return on invested capital) of 21%. Judging by the stock price appreciation over the same period, this is a trend that will likely not slow down any time soon.

Management knows this, so they have been buying back shares more aggressively lately. Over the 2019-2021, share repurchases were made around price-to-earnings ratios of 27.0x to 38.0x.

Today, as the stock trades for roughly 18.0x P/E, you will likely see a massive repurchase program being implemented by the time the company reports its next quarter. Analysts may be ahead of the curb this time, as they currently see a consensus price target of $545.13.

The stock would need to rise by roughly 36.7% from today's prices to reach this target, which is not an abnormal year for this high achiever. 

Moats at a Discount

Now that you understand how profitable - and steady - Ulta's business is, it should become easier to start considering this name a potential value play. The obvious question for a value investor now becomes: How much should I pay for this business?

Keep in mind that, apart from the sell-offs during COVID-19, Ulta stock has not traded at these P/E ratios ever since the great recession 2008. 

Yet, over the same period, EPS has increased nearly twenty times. Double-digit returns on capital, tailwinds to keep pushing for even more growth, and a completely irrational discount in the stock. Are you missing any other ingredients to make this your own Buffett moment?