On May 21, we issued an updated research report on Sonic Automotive Inc (SAH - Free Report) . The company actively pursues capital-deployment strategies to boost shareholder value. Its focus on expanding the network of stores and growing the used-vehicle business to boost sales bodes well. However, sluggish demand amid the coronavirus pandemic might hurt its sales and earnings.
Sonic Automotive beat estimates in each of the trailing four quarters, the average positive surprise being 39.17%.
Solid Q1 Results
Sonic Automotive registered adjusted earnings per share of 40 cents in the first quarter, beating the Zacks Consensus Estimate of 20 cents. Higher sales from the used vehicle unit led to this outperformance. Moreover, the bottom line came in a penny higher than the 39 cents per share reported in the year-ago quarter on solid performance of the EchoPark segment.
E-Commerce Initiatives to Aid Performance
In response to the coronavirus-led lockdown, the firm has begun to offer a no-contact purchase experience, allowing 90% of a vehicle transaction to be completed on its website or by phone and delivered to the guest with a safe, no-contact home delivery. These e-commerce initiatives undertaken by the firm are likely to offer respite from the lower footfall at its stores due to the pandemic.
EchoPark Segment Stokes Growth
Sonic Automotive’s focus on expanding the network of stores and growing the used-vehicle business to boost sales bodes well. The used-car segment EchoPark is a major growth engine of Sonic. Although it is likely to be under pressure temporarily amid the pandemic, the segment’s long-term prospects remain intact. EchoPark investments are anticipated to drive significant unit share gains in the days to come. The segment generated revenues of $1.2 billion and segmental income of $9.1 million, up 66% and 117%, respectively, in 2019.
Capital-Deployment Strategies Boost Shareholder Value
Sonic Automotive actively pursues capital-deployment strategies to boost shareholder value. The company is a great dividend stock, having a payout yield that outperformed the broader industry over the past year. The company has hiked its dividend for four consecutive years and is increasing it by an average of 25.99% each year.
Few Headwinds to Counter
Weak Consumer Sentiment Amid Coronavirus Woes
The COVID-19 pandemic has impacted Sonic Automotive’s operations across the United States, with lower footfall at stores. This is likely to thwart sales and earnings of the automotive retailer. With stay-at-home orders enforced in full swing in various states, the firm’s sales and earnings are likely to be under pressure in the second quarter.
Further, as Sonic Automotive purchases some of the new vehicles and parts from foreign manufacturers, its business is subject to foreign-exchange rate risk. Soft performance at BMW and Honda dealerships is impacting gross margins amid lower manufacture-to-dealer incentives on certain models. This is likely to continue in the coming periods as well. Tariffs also remain a concern, which escalates the cost of raw materials, in turn, denting the company’s margins.
Rising Expenses to Hurt Margins
The company has been bearing the brunt of high SG&A expenses for the last several quarters. Its SG&A expenses — as a percentage of gross profit — was 80.5% in first-quarter 2020, reflecting a rise from the prior year’s 68.8%. Continued rise in SG&A expenses might clip profit margins in the upcoming period. Further, the company's stretched balance sheet plays a spoilsport. Its total debt-to-capital ratio stands at 0.64, higher than its industry's 0.49. A high debt-to-capital ratio restricts the firm’s financial flexibility. Moreover, the company’s times interest earned ratio of negative 0.08 compares unfavorably with the industry’s 2.72.
Sonic Automotive, along with Penske Automotive Group, Inc. (PAG - Free Report) falls under the Automotive-Retail and Whole Sales Industry. The company’s stock has depreciated 21.8%, year to date, compared with the industry’s decline of 26.8%.
Zacks Rank & Stocks to Consider
Sonic Automotive currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the same sector are Tesla, Inc. (TSLA - Free Report) and Arcimoto, Inc. (FUV - Free Report) , each carrying a Zacks Rank of 2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Tesla has an expected earnings growth rate of 3431% for the current year. The stock has appreciated 97.8%, year to date.
Arcimoto has a projected earnings growth rate 40% for 2020. The company’s shares have gained 39.7%, year to date.
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