Earnings Preview: Ulta Salon

Sell this cosmetic and fragrence retailer before it releases earnings Thursday

By Jamie Dlugosch Sep 6, 2011 12:14PM

There is a tremendous amount of noise in the market that can influence stock price.

Ultimately, the value of a stock is based on the present value of future profits.

 

When a company reports earnings results, market participants receive a key piece of information that can be used to determine the price of a stock. For a brief moment in time after a company releases its operating performance, the market will adjust pricing based on how the numbers match up against current expectations.

 

In many cases stocks of companies reporting results will move significantly higher or lower.

 

Understanding how investors use earnings against Wall Street estimates creates a profitable trading opportunity. Using a few key variables combined with understanding how the market will react to new information can guide you how to trade a stock in advance of the news being reported.

 

Use the Earnings Predictor to help you identify winning trades. On Thursday Ulta Salon (ULTA) reports earnings for the quarter ending July 31, 2011.

 

Current situation:

 

Ulta Salon is one hot stock having bested earnings estimates in each of the last 4 quarters:

 

Earnings History

Jul 10

Oct 10

Jan 11

Apr 11

EPS Est

0.18

0.20

0.44

0.31

EPS Actual

0.22

0.23

0.49

0.37

Difference

0.04

0.03

0.05

0.06

Surprise %

22.20%

15.00%

11.40%

19.40%

 

6 stocks to sell in September

 

As you can see those earnings beats have been significant. Justifiably so, shares of Ulta Salon have been on a straight path higher over the last year. The strong performance may be coming to an end this quarter. Investors have already trimmed 15% from the value of the company since July 22. Anticipation of a double dip recession has been hitting consumer retail stocks hard. Relatively speaking the selling in Ulta has been somewhat tame compared to other names in the space.

 

Given the strong performance against Wall Street estimates, expectations for Ulta Salon in the current period are slightly higher. The average estimate has increased by 2 cents per share since the last report was released approximately 90 days ago.

 

For the full year ending January 31, 2012 the consensus estimate is for the company to

make $1.64 per share. That number jumps an impressive 25% in the following year to $2.05 per share. Despite recent selling in the stock, Ulta Salon still trades for a hefty 34 times current year estimated earnings.

 

Over the last year shares of Ulta Salon have doubled in value:

 

Analysis:

 

Investors should be quite cautious in advance of Ulta Salon releasing earnings on Thursday. Shares have held up relatively well compared to other retail stocks on expectations of a strong report. Recent history would suggest that another earnings beat is in the cards. That said the market is more focused on the future at the moment. How the stock reacts after the news is released depends more on guidance than anything else. Here it is reasonable to assume that forecasts for an increasingly gloomy future will be muted. Management will have every reason to dampen enthusiasm for future profit growth. Doing so would simply set the bar lower for future quarters. With shares trading for a premium valuation any reduced guidance should result in this stock selling lower after its report. The preponderance of data suggests this is a stock to sell in advance of earnings.

 

Earnings Beat Probability: ULTA has a 75% chance of meeting or beating estimates, but guidance for the future is likely to be lower.

 

The Earnings Predictor (long recommendations only) had 24 winning trades and only 14 losers during the last July/August earnings season. The total aggregate return for subscribers was 12%. That compares quite favorably to the 12% loss in the S&P 500 over the same period. To become a subscriber for the October season, drop me an e-mail at jdlugosch@gmail.com.

 

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