Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.
What we’re looking for
The graphs you’re about to see tell Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA)’s story, and we’ll be grading the quality of that story in several ways:
Growth: Are profits, margins, and free cash flow all increasing?
Valuation: Is share price growing in line with earnings per share?
Opportunities: Is return on equity increasing while debt to equity declines?
Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let’s take a look at Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA)’s key statistics:
ULTA Total Return Price data by YCharts.
| Passing Criteria | 3-Year* Change | Grade |
|---|---|---|
| Revenue growth >30% | 82.8% | Pass |
| Improving profit margin | 104.2% | Pass |
| Free cash flow growth >Net income growth | (37.3%) vs. 273.2% | Fail |
| Improving EPS | 242.8% | Pass |
| Stock growth (+ 15%) <EPS growth | 311.3% vs. 242.8% | Fail |
Source: YCharts. * Period begins at end of Q2 (April) 2010.
ULTA Return on Equity data by YCharts.
| Passing Criteria | 3-Year* Change | Grade |
|---|---|---|
| Improving return on equity | 43.9% | Pass |
| Declining debt to equity | No debt | Pass |
Source: YCharts. * Period begins at end of Q2 (April) 2010.
How we got here and where we’re going
Ulta could use a little touch-up on its free cash flow, which has been stuck in neutral for years as earnings have soared. The company’s flying share price has also cost it a passing grade by getting too far ahead of the growth in its earnings. However, Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) still mustered five out of seven passing grades, which is a strong showing — we can’t grade the company on dividends, as it only made one special payout a year ago. What can this salon supplier do to get itself a perfect score next time? Let’s dig a little deeper.
