Sonic Automotive Earnings: High Optimism for a Strong Fourth Quarter Is Justifiable

Sonic Automotive's stock rose nearly 20% the morning of Oct. 26 after it reported adjusted diluted EPS of $2.02 that fell 9% year over year but still beat the $1.79 Refinitiv consensus. We see no reason to change our $61 fair value estimate. The dealer sector this earnings season continues to report healthy demand, especially for new vehicles. Yet, new and used profits are compressing as new vehicles decline from record levels caused by the pandemic, which also affected vehicle affordability for both consumers and retailers. We agree with president Jeff Dyke's optimism for fourth-quarter results because Sonic's high BMW exposure often does well in the fourth quarter. It will also be the first quarter in a long time in which overall new vehicle inventory exceeds 10,000 units. Toyota and Honda supply remains the lowest, as it is across our coverage, with Honda under 10 days' supply. Also encouraging to hear is that Sonic's BMW electric vehicle profitability is as good as its BMW combustion sales. Further, all Sonic dealers are seeing much higher profitability on EV repair versus combustion jobs. BMW typically constitutes over 20% of Sonic's total revenue.