The Right Move At The Right Time For Sonic Automotive
Execs at Sonic Automotive (NYSE:SAH) couldn’t know how right their decision to pursue an Echo Park expansion was. The expansion of the used-only franchise got underway early in 2019 and has only outperformed the expectations in the time since. Now, with the company in the process of expanding Echo Park even more, the outlook for growth is as good as it has ever been. The only question for us here at MarketBeat is when will it be the right time to buy more?
Sonic Automotive Delivers Mixed Results
The Q4 results from Sonic Automotive were a bit mixed but only in comparison with the consensus estimates. The consensus estimates for both revenue and earnings have risen steadily over the past 8 months, earnings by 200%, so there was a high bar for the company to hurdle. That said, the $2.8 billion consolidated revenue missed the consensus by 70 basis points but is up 1.8% over last year and an all-time company record.
On a segment basis, the Echo Park locations are by far the best-performing, up 25.45 YOY, while franchised dealers also saw gains. The gains at Echo Park are driven by a combination of rising volume, company expansion, and rising prices with volume(up 17.1%) getting most of the credit. Turning to the franchised dealerships, volume fell in the quarter but was offset by pricing.
The company saw its SG&A expenses rise by 40 basis points to lag both revenue and profit growth. The tight control of costs helped drive the adjusted margin to a record 68.1% and deliver solid gains on the bottom line. On the bottom line, the GAAP $1.31 missed the consensus by a nickel but is up about 25% from last year. On an adjusted basis, the $1.50 in reported EPS is up 52.7% YOY and beat consensus by a dime.
The company opted not to give guidance for the coming year but the outlook is very positive. The combination of consumer and industry trends with the ongoing Echo Park expansion should drive both revenue and earnings to 2021 gains in the mid to high teens. J.P. Morgan Analyst Rajat Grupta recently upped the stock to an Overweight rating from Neutral citing valuation and growth in the Echo Park locations.
Sonic Automotive Is One Safe Dividend
Sonic Automotive pays one of the safer dividends in the market today. The stock yields about 1.0% with shares trading near $41 and there is also a positive outlook for dividend growth. At face value, the payout ratio is a very low 10% of this year’s earnings, 9% of next, which leaves more than enough room for future increases. Although there has not been an increase for the last two years there is a history of increases to support this idea. The CAGR is still running near 25% which suggests the next/future increase will be substantial as well.
Looking at the balance sheet, there is little to worry about. The company has some debt but it is mostly related to inventory and there is ample cash flow to cover it. The Echo Park expansion is largely self-funded and producing results so its impact on cash-flow, while negative in the near-term, ultimately improves the outlook for future distribution increases.
The Technical Outlook: Sonic Automotive Is Range-Bound
Shares of Sonic Automotive have been range-bound since hitting the August peak and don’t appear ready to break out yet. The Q4 report sent shares tumbling to the mid-point of the range where support is holding up price action. The indicators remain bearish so investors should expect price action to move sideways from here if not retest support and/or move lower. A move lower may find support at the bottom of the range, near the $36 level, if the $40 is broken. Longer-term, we expect this stock to drift sideways before eventually moving higher under the impetus of rising revenue, growing earnings, and a dividend increase.
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