ULTA stock is a value stock to own for the next bull run

It’s not often you find the kind of stocks that would interest Warren Buffett. But driven by several favorable winds, Last beauty NASDAQ:ULTA is at the beginning of a multi-year journey that is slowly making the stock a more accepted deep value stock in the investment community.

As part of the beauty and skincare industry, which could be considered part of a consumer staples stock play, Ulta has the kind of corporate moat around it that any value investor looks for in their next potential buyout target . You’ll find that its brand and impeccable financials make this stock a potential multi-bagger over the next decade, even at today’s prices.

Let’s say you are part of the large percentage of the population who drinks coffee every morning, or that you know someone, perhaps a few people, who likes to shop at Target Co. New York Stock Exchange: TGT. If so, you’ll be happy to learn how Target, Ulta and Starbucks Co. NASDAQ: SBX can offer you a great combination of value stocks.

Start from the beginning

You may find all this interesting, but what constitutes a value stock? According to the Buffett method, everything starts with a company moat. By moat refers to the difficulty of other competitors in the same industry to penetrate the secret formula that the company in question has deciphered.

According to its investor relations website, Ulta currently holds a retention rate of more than 90% among its registered users. This rate is exceptionally rare in the retail industry. It points you in the right direction to a potential business moat. But there’s more to consider.

It doesn’t matter whether the American economy is booming or in crisis; you can bet that beauty products will always be in style, as will skincare. Just like coffee or groceries, people will still need to buy them regardless of whether unemployment is at 2% or 5%, making Ulta a perfect move for the uncertain timing of Federal Reserve policy today.

As Target’s management is now looking to redesign most of its stores, implementing a multibillion-dollar investment plan, Ulta has a new way to overcome the current limit. Nearly every Target center will now have an Ulta and a Starbucks inside, looking to drive more and more traffic to their locations.

However, to confirm Ulta’s growth potential, we recommend using the second step of Buffett’s process, which is to check the financials. In this case, the moats typically manifest themselves in gross and net margins or, more importantly, return on invested capital (ROIC).

Open the books

Digging into Ulta’s finances, here’s what you can find. Gross margins are consistently above 37%, a 10-year average. There may be a handful of retail stocks that can say the same. High gross margins indicate customer loyalty, pricing power, and brand penetration, but you already knew that.

Additionally, net income margins also average an impressive 10% over the past decade. Again, not all retail stocks can say the same; just take a look Dick’s Sporting Goods NYSE:DKS as a similar business model. Its net margins are just 7%.

In addition to keeping much of its revenue as earnings, Ulta’s revenue has grown at a compound average growth rate (CAGR) of 16% over the past decade. Expected to continue growing at double-digit rates, Ulta can quickly become a target for those looking to grow their wealth.

That’s because Ulta has generated an average ROIC rate of 21% over the past decade. Since the end of COVID-19, this rate has accelerated towards the 28% mark.

Annualized stock performance tends to match ROIC rates over the long term, so Ulta stock has produced an insane 7,000% return over the past decade. Now that the company is expanding its financial strength and capital returns, you can expect similar performance over the next decade.

Considering what you know now, it should come as no surprise to learn that analysts of the UBS Group New York Stock Exchange: UBS they updated their price targets on the stock. With a new valuation of up to $690 per share, it is expected to rise 27% from today’s prices.

But they are not alone; JP Morgan Chase & Co. New York Stock Exchange: JPM they followed their price targets of $600 per share, pushing for an 11% rally.

Before you consider Target, you’ll want to hear it out.

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