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Here's Why Investors Should Hold Sonic Automotive (SAH) Now
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Sonic Automotive Inc.'s (SAH - Free Report) top line is likely to benefit from buyouts and acquisitions. Its EchoPark unit also generates considerable growth for the firm. However, supply-chain bottlenecks, stretched balance sheet and low inventory levels are likely to add to woes.
Let’s delve deeper as to why SAH — currently carrying a Zacks Rank #3 (Hold) — warrants a cautious stance right now.
Growth Drivers
Sonic’s efforts to optimize its Franchised Dealership business through organic growth initiatives and strategic acquisitions bode well. The buyout of RFJ Auto Partners, completed in December 2021, is expected to add $3.2 billion to Sonic’s annual revenues, which are incremental to its previously stated target of $25 billion in total revenues by 2025. The RFJ deal has catapulted the firm into the top-five biggest dealership groups in the United States.
Sonic’s EchoPark unit being the major growth engine, witnessed a record third-quarter gross profit of $49 million, up 88% year on year. Strong organic growth fueled by EchoPark expansion will boost Sonic’s prospects. The Echo Park brand has been successful in reaching more than 50% of U.S. population and is on track for 90% coverage by 2025. Importantly, Sonic targets 575,000 unit sales and $14 billion in annual EchoPark revenues by 2025, with a nationwide distribution network of more than 140 stores.
The company’s capital deployment strategies to boost shareholder value through its dividend and share repurchase programs are also praiseworthy. Riding on a robust cash flow generation and sound capital allocation, Sonic increased its quarterly cash dividend by 12% to 28 cents a share from 25 cents previously. SAH’s annualized dividend growth over five years is 32.9%. In the first 10 months of 2022, the company bought back 5.2 million shares. To investors’ delight, it had boosted buyback authorization by $500 million in July. The company’s ROE of 35% compares favorably with the auto sector’s 10%, underscoring management’s efficiency in rewarding investors.
Sonic is also focused on enhancing digital capabilities. Strategic partnership with Cox Automotive and Darwin Automotive to develop a proprietary e-commerce platform and user interface bode well for Sonic Automotive. The company launched its proprietary e-commerce platform, echopark.com, in June in certain regional markets. The e-commerce platform has generated considerable traffic and made significant progress with the national rollout. The success of the digital platform augurs well for the long-term prospects of the unit.
Headwinds
Despite robust growth drivers, Sonic is burdened with certain impediments.
Its focus on store expansion plans is likely to boost long-term growth, but it will also strain the near-term financials of the firm. The auto retailer is bearing the brunt of rising SG&A over the past several quarters. In the last reported quarter, SG&A rose 24% year over year. Massive expansion plans and the rollout of the new stores may limit operating margins and cash flow, going forward.
The company's stretched balance sheet also plays a spoilsport. As of Sep 30, 2022, the company’s long-term debt was $1,442 million against cash and cash equivalents of a mere $139 million a year ago. Its total long-term debt-to-capital ratio stands at 0.6, higher than its industry's 0.31. Moreover, the company’s times interest earned ratio of 5.6 is unfavorable to the industry ratio of 14.19.
Supply chain disruptions have adversely impacted inventory levels. Tight inventory amid global chip concerns may induce lost revenues for the firm. Low inventory levels are particularly conspicuous in the new vehicle segment. In the third quarter, the company’s new vehicle inventory supply was below historical levels. Despite persistent demand, low inventory levels limited new vehicle sales in the last reported quarter.
In addition to new vehicle inventory constraints, declining used vehicle pricing and an uncertain economic environment may pose near-term concerns for the auto retailer. Stiff competition is another headwind. Sonic competes with publicly and privately-owned dealerships, along with Internet-based vehicle brokers.
CarParts has an expected earnings growth rate of 85% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 72.7% upward over the past 30 days.
Allison has an expected earnings growth rate of 26.1% for the current year. The Zacks Consensus Estimate for ALSN’s current-year earnings has been revised 3.8% upward in the past 30 days.
Genuine Parts has an expected earnings growth rate of 18.1% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 2.5% upward over the past 30 days.
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Here's Why Investors Should Hold Sonic Automotive (SAH) Now
Sonic Automotive Inc.'s (SAH - Free Report) top line is likely to benefit from buyouts and acquisitions. Its EchoPark unit also generates considerable growth for the firm. However, supply-chain bottlenecks, stretched balance sheet and low inventory levels are likely to add to woes.
Let’s delve deeper as to why SAH — currently carrying a Zacks Rank #3 (Hold) — warrants a cautious stance right now.
Growth Drivers
Sonic’s efforts to optimize its Franchised Dealership business through organic growth initiatives and strategic acquisitions bode well. The buyout of RFJ Auto Partners, completed in December 2021, is expected to add $3.2 billion to Sonic’s annual revenues, which are incremental to its previously stated target of $25 billion in total revenues by 2025. The RFJ deal has catapulted the firm into the top-five biggest dealership groups in the United States.
Sonic’s EchoPark unit being the major growth engine, witnessed a record third-quarter gross profit of $49 million, up 88% year on year. Strong organic growth fueled by EchoPark expansion will boost Sonic’s prospects. The Echo Park brand has been successful in reaching more than 50% of U.S. population and is on track for 90% coverage by 2025. Importantly, Sonic targets 575,000 unit sales and $14 billion in annual EchoPark revenues by 2025, with a nationwide distribution network of more than 140 stores.
The company’s capital deployment strategies to boost shareholder value through its dividend and share repurchase programs are also praiseworthy. Riding on a robust cash flow generation and sound capital allocation, Sonic increased its quarterly cash dividend by 12% to 28 cents a share from 25 cents previously. SAH’s annualized dividend growth over five years is 32.9%. In the first 10 months of 2022, the company bought back 5.2 million shares. To investors’ delight, it had boosted buyback authorization by $500 million in July. The company’s ROE of 35% compares favorably with the auto sector’s 10%, underscoring management’s efficiency in rewarding investors.
Sonic is also focused on enhancing digital capabilities. Strategic partnership with Cox Automotive and Darwin Automotive to develop a proprietary e-commerce platform and user interface bode well for Sonic Automotive. The company launched its proprietary e-commerce platform, echopark.com, in June in certain regional markets. The e-commerce platform has generated considerable traffic and made significant progress with the national rollout. The success of the digital platform augurs well for the long-term prospects of the unit.
Headwinds
Despite robust growth drivers, Sonic is burdened with certain impediments.
Its focus on store expansion plans is likely to boost long-term growth, but it will also strain the near-term financials of the firm. The auto retailer is bearing the brunt of rising SG&A over the past several quarters. In the last reported quarter, SG&A rose 24% year over year. Massive expansion plans and the rollout of the new stores may limit operating margins and cash flow, going forward.
The company's stretched balance sheet also plays a spoilsport. As of Sep 30, 2022, the company’s long-term debt was $1,442 million against cash and cash equivalents of a mere $139 million a year ago. Its total long-term debt-to-capital ratio stands at 0.6, higher than its industry's 0.31. Moreover, the company’s times interest earned ratio of 5.6 is unfavorable to the industry ratio of 14.19.
Supply chain disruptions have adversely impacted inventory levels. Tight inventory amid global chip concerns may induce lost revenues for the firm. Low inventory levels are particularly conspicuous in the new vehicle segment. In the third quarter, the company’s new vehicle inventory supply was below historical levels. Despite persistent demand, low inventory levels limited new vehicle sales in the last reported quarter.
In addition to new vehicle inventory constraints, declining used vehicle pricing and an uncertain economic environment may pose near-term concerns for the auto retailer. Stiff competition is another headwind. Sonic competes with publicly and privately-owned dealerships, along with Internet-based vehicle brokers.
Key Picks
Here are some better-ranked players in the auto space –CarParts.com (PRTS - Free Report) , sporting a Zacks Rank #1 (Strong Buy), and Allison Transmission Holdings (ALSN - Free Report) and Genuine Parts Company (GPC - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.
CarParts has an expected earnings growth rate of 85% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 72.7% upward over the past 30 days.
Allison has an expected earnings growth rate of 26.1% for the current year. The Zacks Consensus Estimate for ALSN’s current-year earnings has been revised 3.8% upward in the past 30 days.
Genuine Parts has an expected earnings growth rate of 18.1% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 2.5% upward over the past 30 days.