Sonic Automotive: Vroom! Vroom! | Benzinga

• Price: $14.28
• Forward P/E: 9
• Earnings Growth: 36%
• Projected Sales Growth: 12.4%
• Market Cap: $758 million

Why It's Featured: Notable earnings growth; current auto resurgence; high Return on Equity.
Danger Zones: Highly leveraged; volatile stock price; low profit margin.

Sonic Automotive, Inc. (NYSE: SAH) operates as an automotive retailer in the United States. It engages in the sale of new and used cars, light trucks, and replacement parts; provision of vehicle maintenance, warranty, paint, and repair services; and arrangement of extended service contracts, financing, insurance, and other aftermarket products.

As of June 30, 2011, the company operated 136 dealership franchises at 119 dealership locations representing 30 brands of cars and light trucks, as well as 24 collision repair centers in 15 states. The company was founded in 1997 and is based in Charlotte, North Carolina.

One thing stands out about Sonic: its stock went from $33.10 to $1.40 within a 2 year period ('07 and '08). For some readers, that's enough. They'll go to the next site. But for aggressive investors looking for a turnaround story, there's more to know about SAH.

First, earnings are coming back strong. While they were down noticably from '08 to '09 (68 cents from $1.05), they rebounded last year to 99 cents. This year, 8 analysts have a consensus estimate of $1.35, then project $1.57 for 2012. For the third quarter, earnings were 33 cents. Analysts had 31 cents as their estimate. Actual numbers have beaten estimates for the last 4 quarters: 15.4%; 4%; 2.8%; and 6.5% respectively. Fourth quarter earnings are pegged at 37 cents compared to last year's 30 cents in the final period.

During the third quarter, sales rose by 13%, pushed higher by improving auto sales. Earnings went up even more, by 20%, driven by more parts sales, new auto sales, and financing. Many of the auto brands Sonic sells are in the luxury class, ones like Audi, BMW, Lexus, Jaguar, Mercedes Benz and Porsche. Used car sales also increased by more than double digits.

In a well run business, higher sales should lead to better margins as volume spreads fixed costs over more revenues. That's just what happened at Sonic. More revenues, thanks to higher volume and prices, lead to better margins as Selling, General and Administrative costs didn't increase at the same rate, leading to better gross profits. Analysts see the fourth quarter slowing a little after such a robust third quarter. For a full discussion of the third quarter, see the interview with the CEO, Scott Smith, here.

Here's an excerpt that summarizes the quarter as told by Scott Smith:

"Our third quarter results reflected the continuing recovery in the retail automotive sector combined with our focus on being predictable, repeatable, and sustainable. Our EPS from continuing operations was $0.33 per share compared to $0.25 with prior year quarter saw strong growth across all of our business volumes. Our new vehicle volume was up 8% over Q3 last year which again outpaced the industry growth. Our used volume grew 16% over the prior year quarter. With 10 consecutive quarters of double-digit growth, you've proven our ability to consistently grow this core piece of our business through difficult economic and pricing cycles.

Our parts and service business continues to grow steadily with revenues up 5% over third quarter of last year despite having one less service day in the current period. SG&A as a percentage of gross profit at 78.8% was 150 basis point improvement over the third quarter last year. As we continue to leverage our cost, the strong growth profit dollar growth. Our result this quarter continued to reflect the hard work that our teams put into executing a predictable repeatable and sustainable strategic plans and operating playbooks.

As a result, our earnings this quarter and our expectations is fairly stable fourth quarter operating environment we are increasing our full year continuing operators, earnings per share expectation to a range of a $1.33 to $1.37 per share."

To help widen margins, the company's 8.625% notes were retired and replaced with lower cost borrowing and a reduction of $43 million in debt (about 10% of outstanding debt). The company intends to lower its debt further (now 73% of capital). One way of doing it will be for the company to own more of its real estate rather than leasing it.

Management is expanding the footprint of SAH. Recently it opened a new BMW dealership in Beverly Hills. Most likely, as its balance sheet becomes more balanced, the company will look to open more dealerships.

(For more Aggressive stock ideas, see our website: www.theonlineinvestor.com)

Essential Numbers:

• Revenues for the last 12 months: $7.65 billion
• Trailing P/E: 7.4
• Price to sales ratio: .1
• Price to book: 1.46
• Operating margin: 2.79%
• Profit margin: 1.57%
• Return on equity: 27.31%
• Return on assets: 6.18%
• Total cash: $28.01 million
• Cash per share: 53 cents
• Total debt: $1.37 billion
• Total debt to equity: 270.72%
• Current ratio: 1.02
• Book value per share: $9.59
• Beta: 4.25
• 52 week change: 10.31%
• Total Shares Outstanding: 52.69 million
• Float: 32.16 million
• Insiders own: 13.75% of the stock
• Institutions own: 104% of the Float
• Annual dividend: 10 cents
• Yield: .7%

This stock is for the more adventurous, ones that have a strong belief that the economy is rebounding and auto sales will grow, especially in the luxury category. There are some strong numbers in SAH, ones like Return on Equity and high insider ownership. But that high leverage of the balance sheet can come back to bite when interest rates start their inevitable upward movement.

Company Web site: www.sonicautomotive.com

Ted Allrich
November 10, 2011

Ted is the Chairman of the Board of B of I Holding and Bank of Internet USA. He is also the founder of The Online Investor (www.theonlineinvestor.com) which has a Free Newsletter for investors.

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Ted Allrich is Chairman of the Board of BofI Holdings Inc. and Bank of Internet USA. He is also the Founder of The Online Investor (www.theonlineinvestor.com), a site that offers investment ideas and in

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Source: http://www.benzinga.com/news/earnings/11/11/2116947/sonic-automotive-vroom-vroom

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