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Momentum

Sonic Automotive (SAH - Snapshot Report) has been advancing thanks to solid third quarter results, a raised full-year outlook, an impressive debt profile and improving market conditions. The automotive retailer reached a 52-week high of $23.28 on January 4. With double-digit earnings growth expected for 2012 and beyond, SAH has become a Zacks Rank #1 (Strong Buy).

Strong Earnings Growth in Q3

On October 23, Sonic Automotive posted third quarter earnings of 40 cents per share, which fell short of the Zacks Consensus Estimate but rose 17.6% from a year earlier. Revenues grew 11.7% to $2.2 billion.

The increase in revenues was mainly attributable to a solid 25.2% growth in new vehicle sales to 33,737 units, which is the second highest level achieved by the company in its history. Its selling, general and administrative expenses as a percentage of sales also improved to 11.1% from 11.9% in the year-ago quarter.

The company upgraded it adjusted earnings per share guidance for full-year 2012 to between $1.65 and $1.70 from the earlier view of $1.62 to $1.70. Furthermore, the company has no public debt maturity before more than 5 years, which positions it well for future growth.

Earnings Estimate Revisions

The Zacks Consensus Estimate for 2012 is at $1.67 per share, which is up 0.6% in the past 7 days. The Zacks Consensus Estimate for 2013 is at $1.98. The estimates for 2012 and 2013 suggest year-over-year growth of 20.1% and 18.5%, respectively.

Reasonable Valuation

Sonic Automotive’s valuation looks reasonable with shares trading at a forward P/E of 11.4x, which is at a 5% discount to the peer group average of 12.0x. Meanwhile, the price-to-book of 2.1x is below the peer group average of 2.2x and the price-to-sales of 0.2x is on par with the peer group average. The company has a higher 1-year ROE of 17.5% versus the peer group average of 16.9%.

Technically, a new trend formed in the third quarter of 2012 when the 50-day moving average crossed above the 200-day moving average. This bullish situation is stable, as the 50-day moving average lies above the 200-day moving average. Sonic is currently trading above its 50- and 200-day moving averages, which stand at $19.92 and $17.62, respectively.

Volume averages roughly 347K daily. The stock has returned 51.5% in the past year, which is substantially higher than the S&P 500’s return of 16.6%.

Sonic Automotive is one of the largest automotive retailers in the U.S. The $1.3 billion company operated 113 dealerships in 15 states and 23 collision repair centers as of September 30, 2012. It represents about 25 different automotive brands with the majority of the dealerships being luxury and import brands.


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