Warren Buffett’s Bet: Why Berkshire Hathaway Bought Ulta Stock

Key Points

• Berkshire Hathaway disclosed a stake in Ulta Beauty, sending its shares up 10%. Now is the time to buy. 
• Berkshire's purchase confirms a floor for the market, as indicated by institutional and analyst activity. 
• The bar is set low for Q2; a catalyst is in the works that could lead this stock up by 50% or more. 

Warren Buffett and Berkshire Hathaway NYSE: BRK.A filed their quarterly 13-F, sending ripples through equity markets from Apple NASDAQ: AAPL to Ulta Beauty NASDAQ: ULTA. The takeaway from the filing is that Berkshire continues whittling down its position in Apple and other tech plays and is taking a side in the beauty wars. The beauty wars are a battle between newer, hipper brands such as Ulta and e.l.f. Beauty NYSE: ELF is against the legacy cosmetics companies that are losing. The legacy companies are still far larger but are slowly losing market share, while Ulta and e.l.f. gain it, driving value for their shareholders. 

Why would Buffett choose Ulta? The value compared to cash flow, profitability, and balance sheet. Highlights from Q1 include solid margin with the gross at 40%, operating near 17%, and net at 11.5%. The balance sheet details included a slight reduction in cash offset by increased inventory, current and total assets, virtually no debt, and a 15% increase in shareholder equity. The cash flow and balance sheet allow for share repurchases, another factor likely driving Mr. Buffett’s interest, reducing the average count by 4%. Management forecasts these trends to continue and improve.

Berkshire Hathaway Buys 1.4% Stake in Ulta Beauty

Berkshire Hathaway purchased 690,000 shares at an average price near $385. The lot size is worth about 1.4% of the share outstanding, which isn’t much but significant because of the entry point. The $385 target aligns with the bottom of a two-year trading range and a price floor indicated by the analysts. Analysts' activity in 2024 is bearish at face value, resulting in ULTA’s placement on MarketBeat’s list of Most Downgraded Stocks. Still, the critical details not only support this market but suggest a robust rebound is due. 

The analysts have trimmed their targets but remain steadfast in believing this stock is buyable. The twenty-three tracked by MarketBeat have it pegged at a Moderate Buy and see it advancing more than 50% at the consensus midpoint. The consensus is down from its peak, and a new low target of $325 was recently set, but the $325 low is an outlier; eight or 80% of the revisions issued since the Q1 release are in the range of $400 to $544 and 50% are at $500 or higher, suggesting a move to consensus is probable. A move above the consensus is possible. 

Coincidentally, the institutional activity in 2024 is also bullish. The institutions have bought on balance for the YTD period, with most of the activity in Q1 and Q3. That activity aligns with the 2024 price action, which is moving within a range, with Berkshire confirming the bottom. 

Ulta Reports Earnings on August 29th: What to Watch For

Ulta Beauty is scheduled to report earnings on August 29th and will likely provide a bullish catalyst for the market. The analysts have only lowered their estimates since the last report, setting the bar very low and expecting a seasonal sequential downtick in revenue compounded by a weakening margin. Results from e.l.f., which relies heavily on the Ulta Beauty retail channel, grew at a high double-digit pace when adjusted for acquisitions, grew market share, and maintained margin. 

The price action in Ulta is bullish. The market is up 10% on the Berkshire acquisition news and confirms the bottom of the range at $340. Support at $340 appears to be strong, with volume rising to a multi-quarter high. There is some resistance to the move; the price action moves lower after gapping up at the opening but is above the critical resistance point, the 30-day EMA. Assuming support remains firm at that level, shares of Ulta are likely to continue higher, as indicated by MACD and stochastic. The MACD and stochastic oscillators show a Strong Buy signal and a high probability the rebound will continue and may even strengthen.