Ulta Stock: Why Is Buffett Buying?

this 13f filing belongs to the greatest investor of all times and it reveals something very interesting waren Buffett is selling the world's largest company and buying a Cosmetics retailer that is a dominant company in this market there are many reasons why Buffett is selling apple and buying Ulta beauty including their valuation but there is one thing that most investors Overlook and I believe it's why Ulta stock is going to Skyrocket soon so if you're interested in Ulta stock stay with me and I'm going to walk you through why War buff is selling apple and buying Ulta beauty was the one thing that's going to Skyrocket the Ulta stock and I'm also going to Value the stock so you're going to see that Ulta is really trading at a dirt cheap valuation so let me cut the and start with why Warren Buffett is selling Apple before it was the world's most valuable company Apple was on the edge of bankruptcy and one skill saved the company from bankruptcy and made it the most valuable company in the world it's the ability to reinvent itself over and over again when most people think about Apple iPhone is the first thing that they come up with but Apple was originally a computer company and it remained so until 2007 when Steve Jobs announced that the company would change its name from Apple computer incorporated to just Apple Incorporated the renaming solidified Apple shift of focus from just computers to Consumer Electronics in a broader sense that was the latest example of Apple Reinventing itself Apple literally started the age of personal Computing with Apple 2 and then transformed the whole industry with MacIntosh and then it fired its founder and lost the Visionary leader behind his success in the 12 years following Steve Jobs's departure Apple came to the edge of bankruptcy and as a last attempt to survive it acquired Steve Jobs's company and made him the CEO after jobs took over Apple launched a revolutionary desktop computer called iMac and transformed the whole industry all over again a few years later Apple reinvented itself again and introduced the iPod that also transformed how we listened the music in 2007 Apple made it again by introducing the iPhone but this time it didn't change just the mobile phone industry it changed the way we live the iPhone was probably the most transformational consumer electronics device in human history as you see a quick overview of Apple history reveals that it reinvented itself over and over again this kind of changed after Steve Jobs passed away in 2011 Tim Cook took over Apple after Steve Jobs and he made Apple Rich Beyond imaginable under his lead Apple has become the most valuable company in the world however Tim Cook is many things but he's no Visionary Apple still generates most of his revenue from iPhone which changed very little in recent years under Steve jobs' lead the iPhone went through a significant phe shift once in every 2 years however it hardly changed since iPhone 11 this is also true for the other major Apple products like iMac MacBook and iPad slowing Innovation is also reflected in Apple's business performance Revenue growth slowed down from double digits to high single digits and the negative trend is obvious what is worse is that Apple stock price started to move exactly in the opposite direction of the business performance normally you would expect multiples to go down when the revenue growth slows down but Apple's PE multiple has skyrocketed when waren Buffett purchased the stock for the first time in 2016 Apple was trading at just 11 times earnings and revenue growth was much faster now it's trading at 34 times earnings on single digit Revenue growth this is completely insane and triggered Buffett to sell nearly 50% of his Apple position now you're are probably asking where does Ulta fit in this picture it is simple the reasons why Buffett is selling Apple are the exact same reasons why he's buying Ulta beauty Ulta is not in a business that requires it to re invent itself and Leap Frog the competition over and over again in other words Ulta is not Capital intensive it doesn't need to spend much on research and development to stay competitive and this is exactly what Buffett looks for in a potential investment most people think Cosmetics is a discretionary spending but I think it's complete women don't cut Cosmetics unless they really have to this fact is actually illustrated by the consistency of ultas earnings this alone makes up a really strong investment thesis because unlike Apple Ulta doesn't need to reinvent itself every day is a business as usual for Ulta the equation is simple it's going to make money as long as people demand cosmetics and people will always demand Cosmetics the human urge to look more beautiful will never go away Ulta just needs to reach more people by opening new stores and sell more to the existing customers by investing in its customer experience these are way easier to do than making the next iPhone defensive nature of the business and little requirement for Capital expenditures are strong reasons but they are not the only ones for Buffett price is always the decisive Factor unlike Apple Ulta stock price has been consistently declining year to date despite the robust business performance as you see Ulta grew its earnings 16% annually in The Last 5 Years despite this impressive track record is currently trading at just 14 times earnings the price tag relative to its business performance is actually too good to overlook for Buffett so apple is capital intensive and Ulta is capital Light apple is expensive and Ulta is cheap these alone are enough to make up a compelling investment case but there's actually one other reason that secretly positions Ulta stock to become a big winner in the next 5 to 10 years before I explain it to you I'm going to show it to you and here it is this is ultra stock it's a snake eating itself this is because of the insane amount of B bubs it does every year in The Last 5 Years it averaged 3.5% buyback rate meaning it bought back 3.5% of its own stock every year since 2019 this is extremely bullish for two reasons first BuyBacks essentially expands your piece of the pie it means that the net profit generated by the company is now shared among less people so everybody gets a bigger piece of the pie this results in higher per share earnings but this is just beginning BuyBacks also result in higher PE multiples and the reason is simple since the business is aggressively buying back its shares there are now less shares available for the potential buyers this drives the multiples up in the end we have more per share earnings that are multiplied by a higher number this results in an exponentially higher stock price and Ulta is setting itself up for such an explosion in the stock price in March 2024 the previous buyback program announced in 2022 ended and the company announced a new $2 billion of buyback program this allows the company to buy back approximately 11% of the outstanding shares this shows us that the company is dedicated to buy back around 3.5% of the outstanding shares every year this means that the company will have 177% less shares after 5 years this is indeed going to Skyrocket the stock all these are amazing reasons to buy Ulta beauty but it gets even more amazing when you value the company and see what it promises so let's conduct a quick valuation to see where the stock is heading in the next 5 years a reasonable valuation always starts with predicting the future earnings of the company naturally the first step is determining whether the earnings of the company is consistent so we can make Dependable predictions based on the past performance if the company doesn't have consistent earnings you shouldn't even bother valuing it because whatever you do will be just a speculation we are lucky that ult has extremely consistent earnings because people always buy cosmetics and ult is the most convenient way of buying Cosmetics for most of the people in the United States the next step is coming up with conservative prediction for Revenue growth in The Last 5 Years Ulta grew its Revenue 9% annually we can conservatively assume that adjusted profit margin will be around 11% this gives us $1.8 billion of net income for 2029 up from $1.2 billion in 2023 and now we're going to see the real magic Ulta currently has 47.7 million shares outstanding assuming 3.5% annual buyback rate for the next 5 years Ulta is going to have 39 million shares outstanding this gives us $46 of earnings per share take into account that Ulta's medium p ratio in the last 10 years was 30 so even if you act extremely conservative and value it at just 10 times earnings we have $920 per share price Target this is more than two times of today's valuation this is this is a huge promise of odd performance and the business's power and potential to fulfill this promise I owned Ulta stock way before Buffett but it's now so cheap that I'm regularly adding on my position if you don't own it I think following buffet in this one makes a lot of sense as a stock still trades around Buffett's entry price but I have to warn you you shouldn't expect Ulta to Skyrocket your portfolio in a few days it's a slow but steady compounder you should also own other quality growth companies to outperform the market if you're looking for other potential additions to your portfolio take a look at this video where I explain why Amazon is a must own company that trades it a reasonable valuation and please subscribe to the channel for more content like this