Ulta Beauty, Inc. (ULTA) vs. PDC Energy, Inc. (PDCE): Which is the Better Investment?

Ulta Beauty, Inc. (NASDAQ:ULTA) shares are down more than -7.63% this year and recently decreased -0.87% or -$1.99 to settle at $226.16. PDC Energy, Inc. (NASDAQ:PDCE), on the other hand, is up 5.78% year to date as of 09/12/2019. It currently trades at $31.48 and has returned -0.54% during the past week.

Ulta Beauty, Inc. (NASDAQ:ULTA) and PDC Energy, Inc. (NASDAQ:PDCE) are the two most active stocks in the Specialty Retail, Other industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect ULTA to grow earnings at a 13.34% annual rate over the next 5 years. Comparatively, PDCE is expected to grow at a 38.40% annual rate. All else equal, PDCE’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 55.07% for PDC Energy, Inc. (PDCE). ULTA’s ROI is 35.90% while PDCE has a ROI of 1.90%. The interpretation is that ULTA’s business generates a higher return on investment than PDCE’s.

Cash Flow

The amount of free cash flow available to investors is ultimately what determines the value of a stock. ULTA’s free cash flow (“FCF”) per share for the trailing twelve months was +4.02. Comparatively, PDCE’s free cash flow per share was -0.32. On a percent-of-sales basis, ULTA’s free cash flow was 3.52% while PDCE converted -1.29% of its revenues into cash flow. This means that, for a given level of sales, ULTA is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. ULTA has a current ratio of 1.80 compared to 0.70 for PDCE. This means that ULTA can more easily cover its most immediate liabilities over the next twelve months. ULTA’s debt-to-equity ratio is 0.00 versus a D/E of 0.51 for PDCE. PDCE is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

ULTA trades at a forward P/E of 16.79, a P/B of 7.15, and a P/S of 1.91, compared to a forward P/E of 9.94, a P/B of 0.87, and a P/S of 1.27 for PDCE. ULTA is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. ULTA is currently priced at a -22.91% to its one-year price target of 293.38. Comparatively, PDCE is -34.77% relative to its price target of 48.26. This suggests that PDCE is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. ULTA has a beta of 1.14 and PDCE’s beta is 0.97. PDCE’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. ULTA has a short ratio of 2.73 compared to a short interest of 5.41 for PDCE. This implies that the market is currently less bearish on the outlook for ULTA.

Summary

PDC Energy, Inc. (NASDAQ:PDCE) beats Ulta Beauty, Inc. (NASDAQ:ULTA) on a total of 8 of the 14 factors compared between the two stocks. PDCE generates a higher return on investment and is more profitable. In terms of valuation, PDCE is the cheaper of the two stocks on an earnings, book value and sales basis, PDCE is more undervalued relative to its price target.