Sonic Automotive Slowing

Sonic Automotive, Inc. (SAH - Snapshot Report) is focused on improving margins by lowering selling, general and administrative (SG&A) expenses. However, Sonic is in an industry experiencing increasing competition and lower car sales. The company is limited in how much more it can cut costs. However, there is a limit as to how far employee costs can be reduced, as employee turnover remains a problem for the company.

Sonic Automotive is operating in a difficult sales environment. Incentive packages are attached to many car models, a sign of continued slow sales. Recently, the domestic automakers have come under considerable pressure, as foreign manufacturers have been benefiting from the introduction of a host of new products.

As a result, should the domestic automakers encounter further market share erosion beyond our expectations, or announce incentive programs larger than expected, we believe Sonic's sales and earnings would be negatively impacted. Most of the company’s weakness in car sales can be traced to new car sales and wholesale sales.

Currently, shares of Sonic Automotive, Inc. are trading at 6.5x our 2008 EPS estimate of $2.49. However, owing to a slow sales environment and falling margins, we rate the stock a Sell. The six-month target price for Sonic is $13, which is 5.2x 2008 EPS.

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