Ulta Beauty Investors Failing To Reward Stock For Tax Tailwinds, Says Wells Fargo

Beauty product retailer Ulta Beauty Inc ULTA stands to be a major beneficiary of the corporate tax cut, and the Street may not be fully appreciating this tailwind, according to Wells Fargo. 

The Analyst

Wells Fargo's Ike Boruchow upgraded Ulta's stock rating from Market Perform to Outperform with a price target boosted from $220 to $275.

The Thesis

Ulta's 100-percent domestic-focused business makes it clear that the retailer will benefit from tax reform, Boruchow said in the Wednesday note. (See the analyst's track record here.) 

Since the House tax bill was approved by the Ways and Means Committee in early November, Ulta has only gained 14 percent versus other companies with a 30-percent-plus tax rate — a group to which Ulta belongs — that have gained more than 30 percent over the same time period.

This makes it clear that investors are "not rewarding" Ulta's stock with upside potential from tax reform, something the company clearly deserves, Boruchow said. Not only has Ulta's stock benefited from tax reform to the degree others have, its multiple has actually contracted, he said.

A multiple expansion is justified given an estimated $2 per share — or more — benefit from tax reform, which represents a 22-percent tailwind to Ulta's EPS growth, the analyst said. 

So long as Ulta's management team delivers a comp growth within its own outlook range of 7-9 percent, a 20-percent EPS growth profile remains intact, Boruchow said. Ulta should deliver its fourth consecutive year of at least 20-percent bottom-line growth in fiscal 2017, he said. 

Price Action

Shares of Ulta Beauty were up 5.69 percent at $242.70 at the time of publication. 

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