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Dr. Paul Price
Dr. Paul Price
Articles (513)  | Author's Website |

A Not-So-Super Sonic

March 28, 2013 | About:

Shares of drive-in restaurant operator Sonic (NASDAQ:SONC) have been on a roll (pun intended). The stock rallied from a 52-week low of $6.84 to close Wednesday at $12.88. Adjusted earnings for the end of February quarter came in at 5 cents versus 3 cents a year earlier in the seasonally weakest (winter) quarter for this open-air eatery. Same-store sales were flattish, although 2012 was a leap year with one extra selling day.


Should you be eating up Sonic’s positive momentum or digesting gains? I’d suggest taking profits or avoiding the shares.

Quick service restaurants in general face some major headwinds. Minimum wage increases, Obamacare-related costs and the FICA tax holiday reversion all conspire against profitability. Sonic, in particular, has not shown good results since fiscal year 2008 (ended Aug. 31, 2008).


From fiscal year 2008 through fiscal year 2012 total sales dropped 32.2%. EPS declined by 40%. The share price plunged from a peak of $26.20 in 2007, bottomed and bounced multiple times in 2008, 2009, 2010, 2011 and 2012 to annual highs of $10.90 to $13.10. Each advance proved to be a false start. I wouldn’t bet that this time will be any different.


Company officers have chosen to sell at prices below today's. Director Federico Pena exited almost $290,000 worth at an average price of $11.58 just days ago. The last insider buy was relatively small and took place more than eight months ago.


Sonic has a weak balance sheet and no dividend to support its price. Value Line calls a "C" financial strength rank as their lowest rating, other than default. Of note, all the debt comes due within five years.


Wall Street research has been busy cheer leading to explain Sonic's recent share price action. Barron's just endorsed it as a good buy while noting it was no longer cheap.


Why pay 18.4 times the fiscal year 2013 estimate of $0.70 for a serial disappointer in an industry with unfavorable conditions working against its success?

Disclosure: No position

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Dr. Paul Price


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Rating: 3.4/5 (7 votes)


AlbertaSunwapta - 4 years ago    Report SPAM
I remember thinking once that what probably killed the A&W Drive-in-Restaurant business model by the early 1980s was shrinking car size and velour seats. :-)

Now, leather is prevalent and many vehicles are huge (esp. pickups) and oil and gas prices are moderating. But the attitude today among today's better food-educated young for Sonic's style of food sure limits any upside in my mind.

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GuruFocus has detected 4 Warning Signs with Sonic Corp $SONC.
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