Sonic Automotive Inc. - Momentum

SAH 0422312

Sonic Automotive (SAH)

Rarely will a stock that misses earnings estimates be selected as a momentum rank-buy; but given the details of the report, Sonic may have upside from these levels.

Sonic has held above its 200 day moving average and been in an upward trend since October. Yesterday’s selloff following an earnings miss sent shares down roughly 9%, which may actually attractive buyers at advantageous prices and allow the momentum in this stock to continue. With a P/E of less than 10, a PEG ratio of 0.6 and relatively strong growth since the recession, Sonic’s shares may have value here.

Automotive sales have been on the rise over the past several months and the trend seems to be continuing according to sources.

Company Description & Developments
Sonic operates over 100 dealerships spread across 15 states and in 26 major metropolitan markets, representing approximately 30 different automotive brands with the majority of the dealerships being luxury and import brands with high exposure to Honda (whose sales have been comparatively lackluster). Sonic Automotive, Inc. is a Fortune 500 company and part of the Russell 2000 Index. They are among the largest automotive retailers in the United States.

SAH reported Q12012 earnings of $19.5 million which was a 24% increase over the prior year. Earnings per share increased 22% to $0.33 compared to $0.27 in the prior year quarter.

Total Q1 revenues up 9.3% over prior year quarter
New vehicle retail revenue up 12.1% in Q1
Used vehicle revenue up 9.0% for the quarter
Parts and Service revenue up 5.1% in Q1
SG&A to gross profit % down 30 bps to 79.4% for the quarter

As you can see, the earnings were far from devastating, but they did miss estimates. Combining a miss with the broad market selloff sent shares sharply lower.

Financial Profile
SAH is a small-cap (944 million) company that is trading at about 10 times forward (expectations for next quarter) earnings. SAH became a Zacks Rank 1 strong buy on March 7th. We may see the stock drop to a Rank 2 or 3 if analysts make negative adjustments after this report. SAH is expected to earn $1.66 in FY2012 according to the Zacks Consensus Estimate.

Earnings Estimates
On April 23rd, Sonic reported earnings that missed estimates by 1 cent (3%).

But in the press release Jeff Dyke, EVP of Operations noted, “We achieved record first quarter revenues of nearly $2 billion with our current complement of stores. Our new vehicle retail unit volume, which increased 11.2% versus the first quarter of 2011, outpaced the new vehicle retail industry volume increase. We are excited about the possibilities of further improvement resulting from our continued focus on efficient execution of our selling and customer service processes.”

B. Scott Smith went on to say “We are pleased with this quarter’s results. Our overall profitability increased significantly from the prior year quarter due to our strong revenue growth”

This positive commentary further supports the thesis that this selloff may be overdone, but of course only the markets can determine that for sure.

Expectations are for SAH to generate $0.40 in income the coming quarter. In the coming days, we will most likely be seeing revisions from the analysts that cover the stock as they update their data and models.

Market Performance & Technicals
As stated, SAH has been trending higher since hitting a low of $10.11 in October 2011. Since then the stock has maintained trend above its 200 day moving average, which now stands at $15.11. Look for this area to be support for the stock.

In the past week alone, the SAH has given back roughly 16% of its value. SAH has exceeded the S&P 500’s performance by 29% in the past year and almost 6% in the past 3 months. Given the recent pullback, it’s now at parity with the major markets over the past month.