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Sonic (SAH) Banks on EchoPark Expansion: Is it Worth Buying Now?
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Sonic Automotive (SAH - Free Report) remains committed to expand its used vehicle business, EchoPark. The company recently opened a new EchoPark store in Johnson City, TN. This marks the auto retailer’s fourth store in Tennessee. In December 2021, SAH opened a store in Chattanooga. The other two EchoPark stores in Tennessee are located in Nashville and Knoxville.
The latest store in Johnson City brings the total EchoPark store count to 36. This excludes the 11 Northwest Motorsport pre-owned vehicle stores acquired through the RFJ Auto Partners buyout in December 2021. The EchoPark brand reached more than 30% of the U.S. population at 2021-end and aims for 90% U.S. population coverage by 2025.
The EchoPark unit is the major growth engine of Sonic. The unit retailed all-time record used vehicle unit sales of 77,835 in 2021, up 36.2% year over year. EchoPark revenues hit a record high of $2.3 billion in 2021, up 65.3% year on year.
Importantly, Sonic targets 575,000 units sales with a nationwide distribution network of more than 140 EchoPark stores by mid-decade. It aims to achieve $14 billion in annual EchoPark revenues by 2025, driving toward the annual vehicle sales goal of 2 million units at maturity.
EchoPark stores seek to provide a wide selection of high-quality used vehicles and a modern shopping experience, with a deep focus on customer satisfaction. The strategic partnership with Cox Automotive and Darwin Automotive to develop a proprietary e-commerce platform and user interface is also speeding up EchoPark’s expansion plans.
Is EchoPark the Only Catalyst for Sonic?
Sonic’s EchoPark segment operates independently from its franchised dealerships business. As of Dec 31, 2021, Sonic operated 110 stores in the Franchised Dealerships segment. This includes 22 franchised dealerships acquired through the RFJ buyout. The RFJ buyout substantially boosted Sonic’s portfolio and geographical footprint, catapulting the firm into the top-five biggest dealership groups in the United States.
In addition to the EchoPark business, the acquisition of RFJ is a major booster for Sonic. The buyout of RFJ is expected to add $3.2 billion to Sonic’s annual revenues, which is incremental to its previously stated target of $25 billion in total revenues by 2025.
Sonic is raking profits amid preference for personal mobility and average rising prices of both new and used cars. Supply-demand mismatch has boosted vehicle margins for Sonic. The firm’s total revenues for 2021 were $12.4 billion, up 28% year over year. It generated a net income of $349 million, turning around from 2020 loss of $51.4 million. The Zacks Consensus Estimate for Sonic’s earnings and sales for the current year calls for a year-over-year surge of 19% and 34%, respectively.
SAH’s commitment to actively pursue capital deployment strategies to boost shareholder value through its dividend and share repurchase programs is also impressive. Recently, the company approved a 108% increase in quarterly cash dividend to 25 cents per share from 12 cents, payable on Apr 14, 2022, to all stockholders of record on Mar 15, 2022. It should be noted that Sonic’s ROE of 38% compares favorably with the industry’s 28% and the auto sector’s 15%, underscoring management’s efficiency in rewarding investors. SAH also seems to be attractively valued at a 4.75 forward P/E compared with its peer group’s 5.74.
Temporary Hurdles in the Path
Riding on the EchoPark unit strength, strong vehicle margins, digitization ramp-up and the RFJ buyout, the company seems a good investment for the long term. Yet, considering inflation concerns and supply chain snarls, what about SAH’s near-term prospects?
Before the war in Ukraine started, many experts predicted that inflation would cool off in spring. It now appears that higher inflation would persist for longer. Consumers might be prompted to limit discretionary purchases.
Sonic is already struggling with low inventory levels, which are particularly conspicuous in its new vehicle segment. The company exited 2021 with franchised dealerships new vehicle inventory of 11 days’ supply.
The geopolitical conflict between Russia and Ukraine is exacerbating supply-chain issues. The resurgence of COVID-19 and renewed lockdowns in China due to its zero-tolerance policy are further disrupting the global supply chain.
With automakers scrambling to procure chips and forced to halt production lines yet again, consumers may have a hard time finding new vehicles and specific models at dealerships, which may induce lost revenues for Sonic. With vehicle prices going through the roof and limited choice at dealerships, they may not be willing to pay a heavy premium and instead wait on the sidelines.
In addition to these macro headwinds, the firm’s rising debt pile is also somewhat concerning. As of Dec 31, 2021, the company’s long-term debt increased to $1,561.2 from $720.1 million as of 2020-end. Store expansion plans are likely to boost long-term growth but strain the near-term financials and cash flow of the firm. The auto retailer has been bearing the brunt of rising selling, general & administrative (SG&A) costs over the last several quarters. In 2021, SG&A costs rose 24% year over year.
Parting Thoughts
Notwithstanding the short-term headwinds, Sonic still seems an attractive pick for long-term growth. So, if you already hold the stock, stay invested. If not, then considering the overall precarious investment environment now, investors might as well wait for more clarity and buy the stock at a better entry point.
Below we highlight two auto retailers AutoNation (AN - Free Report) and Lithia Motors (LAD - Free Report) that currently carry a Zacks Rank #1 and #2 (Buy), respectively.
America’s largest automotive retailer, AutoNation is riding high on a strong footprint, large dealer network, aggressive store expansion efforts and the brand extension strategy. The recent acquisitions of Peacock Automotive and Priority 1 Automotive are set to add $380 million and $420 million, respectively, to AutoNation’s annualized revenues. AN’s digital platform — AutoNation Express — and focus on operational discipline are fueling top- and bottom-line growth of the firm.
AutoNation has a long-term expected EPS growth rate of 23.5%. The Zacks Consensus Estimate for its 2022 earnings and sales indicates a year-over-year uptick of 10.6% and 6.3%, respectively.
Another noteworthy name in the auto retail space, Lithia is well positioned for sales and profit growth on diversified product mix and multiple streams of income. Lithia’s Driveway e-commerce program is helping it to further boost prospects. The firm’s strategic buyouts are fortifying its market share and portfolio. LAD — being committed to maximizing shareholders’ wealth — increased its dividend in each of the last five years, with an annualized growth rate of 5.92%.
Lithia has a long-term expected EPS growth rate of 4.6%. The Zacks Consensus Estimate for its 2022 sales indicates a year-over-year uptick of 16%. Lithia steadily exceeded earnings expectations in the last four quarters.
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Sonic (SAH) Banks on EchoPark Expansion: Is it Worth Buying Now?
Sonic Automotive (SAH - Free Report) remains committed to expand its used vehicle business, EchoPark. The company recently opened a new EchoPark store in Johnson City, TN. This marks the auto retailer’s fourth store in Tennessee. In December 2021, SAH opened a store in Chattanooga. The other two EchoPark stores in Tennessee are located in Nashville and Knoxville.
The latest store in Johnson City brings the total EchoPark store count to 36. This excludes the 11 Northwest Motorsport pre-owned vehicle stores acquired through the RFJ Auto Partners buyout in December 2021. The EchoPark brand reached more than 30% of the U.S. population at 2021-end and aims for 90% U.S. population coverage by 2025.
The EchoPark unit is the major growth engine of Sonic. The unit retailed all-time record used vehicle unit sales of 77,835 in 2021, up 36.2% year over year. EchoPark revenues hit a record high of $2.3 billion in 2021, up 65.3% year on year.
Importantly, Sonic targets 575,000 units sales with a nationwide distribution network of more than 140 EchoPark stores by mid-decade. It aims to achieve $14 billion in annual EchoPark revenues by 2025, driving toward the annual vehicle sales goal of 2 million units at maturity.
EchoPark stores seek to provide a wide selection of high-quality used vehicles and a modern shopping experience, with a deep focus on customer satisfaction. The strategic partnership with Cox Automotive and Darwin Automotive to develop a proprietary e-commerce platform and user interface is also speeding up EchoPark’s expansion plans.
Is EchoPark the Only Catalyst for Sonic?
Sonic’s EchoPark segment operates independently from its franchised dealerships business. As of Dec 31, 2021, Sonic operated 110 stores in the Franchised Dealerships segment. This includes 22 franchised dealerships acquired through the RFJ buyout. The RFJ buyout substantially boosted Sonic’s portfolio and geographical footprint, catapulting the firm into the top-five biggest dealership groups in the United States.
In addition to the EchoPark business, the acquisition of RFJ is a major booster for Sonic. The buyout of RFJ is expected to add $3.2 billion to Sonic’s annual revenues, which is incremental to its previously stated target of $25 billion in total revenues by 2025.
Sonic is raking profits amid preference for personal mobility and average rising prices of both new and used cars. Supply-demand mismatch has boosted vehicle margins for Sonic. The firm’s total revenues for 2021 were $12.4 billion, up 28% year over year. It generated a net income of $349 million, turning around from 2020 loss of $51.4 million. The Zacks Consensus Estimate for Sonic’s earnings and sales for the current year calls for a year-over-year surge of 19% and 34%, respectively.
SAH’s commitment to actively pursue capital deployment strategies to boost shareholder value through its dividend and share repurchase programs is also impressive. Recently, the company approved a 108% increase in quarterly cash dividend to 25 cents per share from 12 cents, payable on Apr 14, 2022, to all stockholders of record on Mar 15, 2022. It should be noted that Sonic’s ROE of 38% compares favorably with the industry’s 28% and the auto sector’s 15%, underscoring management’s efficiency in rewarding investors. SAH also seems to be attractively valued at a 4.75 forward P/E compared with its peer group’s 5.74.
Temporary Hurdles in the Path
Riding on the EchoPark unit strength, strong vehicle margins, digitization ramp-up and the RFJ buyout, the company seems a good investment for the long term. Yet, considering inflation concerns and supply chain snarls, what about SAH’s near-term prospects?
Before the war in Ukraine started, many experts predicted that inflation would cool off in spring. It now appears that higher inflation would persist for longer. Consumers might be prompted to limit discretionary purchases.
Sonic is already struggling with low inventory levels, which are particularly conspicuous in its new vehicle segment. The company exited 2021 with franchised dealerships new vehicle inventory of 11 days’ supply.
The geopolitical conflict between Russia and Ukraine is exacerbating supply-chain issues. The resurgence of COVID-19 and renewed lockdowns in China due to its zero-tolerance policy are further disrupting the global supply chain.
With automakers scrambling to procure chips and forced to halt production lines yet again, consumers may have a hard time finding new vehicles and specific models at dealerships, which may induce lost revenues for Sonic. With vehicle prices going through the roof and limited choice at dealerships, they may not be willing to pay a heavy premium and instead wait on the sidelines.
In addition to these macro headwinds, the firm’s rising debt pile is also somewhat concerning. As of Dec 31, 2021, the company’s long-term debt increased to $1,561.2 from $720.1 million as of 2020-end. Store expansion plans are likely to boost long-term growth but strain the near-term financials and cash flow of the firm. The auto retailer has been bearing the brunt of rising selling, general & administrative (SG&A) costs over the last several quarters. In 2021, SG&A costs rose 24% year over year.
Parting Thoughts
Notwithstanding the short-term headwinds, Sonic still seems an attractive pick for long-term growth. So, if you already hold the stock, stay invested. If not, then considering the overall precarious investment environment now, investors might as well wait for more clarity and buy the stock at a better entry point.
Shares of Sonic, which currently carries a Zacks Rank #3 (Hold), have inched down 6% on a year-to-date basis. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Below we highlight two auto retailers AutoNation (AN - Free Report) and Lithia Motors (LAD - Free Report) that currently carry a Zacks Rank #1 and #2 (Buy), respectively.
America’s largest automotive retailer, AutoNation is riding high on a strong footprint, large dealer network, aggressive store expansion efforts and the brand extension strategy. The recent acquisitions of Peacock Automotive and Priority 1 Automotive are set to add $380 million and $420 million, respectively, to AutoNation’s annualized revenues. AN’s digital platform — AutoNation Express — and focus on operational discipline are fueling top- and bottom-line growth of the firm.
AutoNation has a long-term expected EPS growth rate of 23.5%. The Zacks Consensus Estimate for its 2022 earnings and sales indicates a year-over-year uptick of 10.6% and 6.3%, respectively.
Another noteworthy name in the auto retail space, Lithia is well positioned for sales and profit growth on diversified product mix and multiple streams of income. Lithia’s Driveway e-commerce program is helping it to further boost prospects. The firm’s strategic buyouts are fortifying its market share and portfolio. LAD — being committed to maximizing shareholders’ wealth — increased its dividend in each of the last five years, with an annualized growth rate of 5.92%.
Lithia has a long-term expected EPS growth rate of 4.6%. The Zacks Consensus Estimate for its 2022 sales indicates a year-over-year uptick of 16%. Lithia steadily exceeded earnings expectations in the last four quarters.