Sonic Auto Should Close Year on High Note

In today's Small-Cap Friday column, we profile one of the larger automotive dealer networks in the country, Sonic Automotive . The company and stock are off to a slow start in 2016. The stock trades much closer to 52-week lows than 52-week highs, but has started to rally a little over the past month. But with GDP projected to grow at a 2.5% clip in the back half of 2016 from the anemic 1% growth level of the past three quarters, the company is well-positioned to close the year on a strong note. Insider activity is encouraging as the company's CEO B. Scott Smith purchased about $1.6 million worth of new shares in August, the first insider purchases in just over two years. Company Overview Sonic Automotive is based in Charlotte, N.C. with just over 100 locations carrying 25 brands of cars as well as 18 automotive repair facilities scattered primarily in the South and Southwestern parts of the U.S. Recently Sonic has recently increased its footprint in fast growing Colorado. It expects to expand in Texas and the Carolinas in 2017 by opening new stores in those states. The company's biggest current market is Houston (21% of sales) followed by Southern (15%) and Northern (14%) California. Sonic Automotive has new and used car franchises. The company's largest selling nameplate is BMW (21% of sales) followed by Honda (16%), Toyota (11%) and Mercedes (10%). The company owns a greater proportion of the properties its facilities sit upon as a strategic focus over the past decade. In 2007, the company owned none of its facilities outright. By 2017, it should own the land of roughly half its stores. Recent Results In its latest quarter the company delivered $0.50 per share of earnings, in line with consensus. This was up some 9% from the same period a year ago. Revenue came in at $2.38 billion, which was approximately $90 million lighter than expectations. The company's customer satisfaction surveys continue to improve as it rolls out the One Sonic-One Experience across all of its stores. This is resulting in better allocations from manufacturers and new brands being awarded to existing stores. Stronger Back Half of 2016 The U.S. economy seems to be picking up steam as we head into the back half of the year. Houston, which is the company's biggest market, has been struggling thanks to the collapse in oil prices over the past two years. However, given crude has risen some $20 a barrel since its lows in February, the energy sector within the economy seems to be stabilizing at least. Sonic guided in its second quarter conference call that it expects $0.52 to $0.54 per share of profit in the third quarter and $0.66 to $0.69 per share in the fourth quarter. If that turns out to be the case, the stock should appreciate nicely thanks to this accelerating earnings trajectory. Shareholder Friendly The company has been very active in returning free cash flow to shareholders. One of the primary ways Sonic does so is to buy back stock. In 2012, its outstanding float stood at 53.2 million shares. As of the last completed quarter, shares stood at just 45.4 million -- a reduction of 16.5% of the outstanding float. This activity has accelerated recently and the company has bought back some $57.5 million of its own shares year to date. Sonic also pays an annual dividend yield of just north of 1%. Growth & Outlook The company has a strong balance sheet and is substantially above all coverage ratios within its loan covenants. Sonic had $1.97 EPS in 2015. This year it looks to do about $2.10 per share in profit and the consensus for 2017 currently projects $2.30 per share. At its current trading level, the stock goes for just over 8x forward earnings. This is in a market currently fetching over 19x forward earnings even as profits within the S&P 500 have fallen on a year-over-year basis for five straight quarters. Competitor Lithia Motors goes for just 11x forward earnings in contrast. I believe Sonic Automotive has an attractive risk/reward profile at current levels of just under $18 a share.

Sonic Auto Should Close Year on High Note

The car dealer has an attractive risk/reward profile.

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