Company Reports

Sonic Automotive's stock rose nearly 11% on April 25 after the firm reported a good first quarter. Adjusted diluted EPS of $1.36 rose 2.3% year over year and beat the $1.30 LSEG consensus. We are leaving our fair value estimate in place. We like that Sonic repurchased $27 million of stock in the quarter below our fair value estimate, and liquidity is solid at $847 million. EchoPark delivered good news with its first positive adjusted EBITDA quarter for any quarter since first-quarter 2021.

Sonic Automotive is expanding beyond franchise auto dealerships. Its omnichannel Digital One Stop process and the CarCash app let consumers shop digitally or in-store and helps Sonic procure more used-vehicle inventory. Management has also worked to make the car-buying process nearly paperless, place the customer with only one person for the entire transaction, and enable the customer to take delivery of a vehicle in an hour or less after deciding which one to buy. It's building out a powersports segment which for now will likely focus on motorcycle stores such as Harley-Davidson.

Sonic Automotive finished 2023 with fourth-quarter adjusted diluted EPS down 37.5% year over year to $1.63, missing the $1.87 LSEG consensus. We don’t see anything in the results to merit a fair value change, but we'll reassess all modeling inputs when we roll the model forward for the 10-K filing. U.S. auto dealers are fighting used-vehicle supply scarcity, poor used-vehicle affordability, and a very tough new vehicle comparable, all due to the chip shortage, so the large EPS decline is not shocking.

Most automakers reported final sales numbers for 2023 on Jan. 3. Adjusting for one selling day fewer, Wards put the year-over-year December sales increase at 17.3% and the seasonally adjusted annualized selling rate at 15.83 million, up from 13.55 million in December 2022. Full-year sales increased 12.4% to 15.46 million. We think the worst of the chip shortage is finally behind the industry, but we expect some supply shortages in 2024. As inventory continues to recover, we expect incentives as a percentage of average transaction price to keep rising from artificially low levels of barely above 2% in late 2022 (currently just over 5%), which will pressure automaker and dealer margins in 2024 relative to the past two years. Better inventory and U.S. interest rates likely done rising should bring some consumers back to the showroom. Affordability remains a challenge though, so we expect only a small increase in 2024 light-vehicle sales to the high 15 million range.

At the Los Angeles auto show on Nov. 16, Hyundai announced a partnership with Amazon in which, starting next year, some of its dealers will sell new vehicles on Amazon.com. The news sent each of the six franchise dealers and CarMax down about 5%-8%, which we think is a large overreaction predicated on fears of Amazon taking share away from dealers. Such a risk is not even possible on new vehicle sales due to state franchise laws, nor do we think it is likely that Amazon wants to do all aspects of auto retailing such as handling and disposing of trade-ins, service, and finance and insurance offerings. Service is a very underappreciated benefit that dealers provide customers when comparing the traditional auto industry to digital retailing and electric vehicle startups' direct sales formats. Should Amazon directly sell used vehicles someday, CarMax would have more competition, but it also has the ability to sell via brick-and-mortar, digital-only, or any combination of both depending on what the customer wants, something a digital-only retailer cannot offer. Our auto coverage has been implementing omnichannel tools for years and we doubt that any of their management teams are surprised by the Amazon news.

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.

Sonic Automotive is undergoing many changes. Rollout of its omnichannel Digital One Stop process and the CarCash app allows consumers to shop digitally or in-store and helps Sonic procure more used-vehicle inventory. Management has also worked to make the car-buying process nearly paperless, place the customer with only one person for the entire transaction, and enable the customer to take delivery of a vehicle in an hour or less after deciding which one to buy. It's now building out a powersports segment which for now will likely focus on motorcycle stores such as Harley-Davidson.

Sonic Automotive’s second quarter saw all-time record quarterly sales, which were up 4.2% year over year. Adjusted diluted EPS of $1.83, though down 25.3%, beat the $1.65 Refinitiv consensus. We are raising our fair value estimate by $2 to $61 on the time value of money and slightly higher revenue to account for 2023 U.S. light vehicle sales trending higher than our prediction of as much as 14.7 million.

Sonic Automotive is undergoing many changes. Rollout of its omnichannel Digital One Stop process and the CarCash app allows consumers to shop digitally or in-store and helps Sonic procure more used-vehicle inventory. Management has also worked to make the car-buying process nearly paperless, place the customer with only one person for the entire transaction, and enable the customer to take delivery of a vehicle in an hour or less after deciding which one to buy. It's now building out a powersports segment which for now will likely focus on motorcycle stores such as Harley-Davidson.

Sonic Automotive's first-quarter adjusted diluted EPS of $1.33 declined 43% year over year and badly missed the $1.86 Refinitiv consensus. We don’t find the actual numbers beyond EPS to be poor or suggesting Sonic’s long-term prospects have worsened. For now, we're giving management the benefit of the doubt that consensus historically runs too high in the first quarter, and we are leaving our fair value estimate in place. Supporting Sonic’s assertion is the year-ago report, when record first-quarter EPS fell short of the Refinitiv consensus, though not as severely as this first quarter’s miss. Also helpful to EPS will likely be further share repurchases. Sonic bought back 5% of its year-end 2022 outstanding share count in the first quarter for $90.7 million, and $374 million of authorization remains. We expect more buybacks this year and further dividend increases. The board increased the quarterly per share dividend by 3.6% to $0.29. We don’t expect a massive acquisition this year. However, $892.6 million of liquidity at March 31, including $432.2 million of cash and floorplan offset funds, gives management flexibility to return cash to shareholders while pursuing growth opportunities and keeping a cash buffer in case of a recession.

Sonic Automotive is undergoing many changes. Rollout of its omnichannel Digital One Stop process and the CarCash app allows consumers to shop digitally or in-store and helps Sonic procure more used-vehicle inventory. Management has also worked to make the car-buying process nearly paperless, place the customer with only one person for the entire transaction, and enable the customer to take delivery of a vehicle in an hour or less after deciding which one to buy. It's now building out a powersports segment which for now will likely focus on motorcycle stores such as Harley-Davidson.

Sonic Automotive had a good quarter to end 2022, with adjusted diluted EPS down 1.9% year over year to $2.61 but still beating the $2.22 Refinitiv consensus. We retain our fair value estimate but will revisit all modeling assumptions after the 10-K is filed. Sonic finished 2022 with $804.5 million of liquidity and throughout 2022 repurchased 14% of its outstanding shares. Total company year-over-year gross profit growth of 8.6% benefited from an 18.9% rise in service dollars and 14.9% growth in finance, the latter is a 100% gross profit business. New vehicle retail gross profit grew only 4.6% while that of used vehicle, including the EchoPark standalone stores, declined by 23.8% on continued high procurement costs for inventory. We expect used vehicle affordability to improve throughout 2023 as the chip shortage improves to increase new vehicle inventory, which in turn should grow used vehicle supply via more trade-ins. EchoPark remains unprofitable in this tough used vehicle retailing environment, losing $33.3 million pretax excluding an impairment charge. Segment used vehicle unit volume rose 11% but fell 6% on a same-store basis. Management likes the results of expanding EchoPark’s offerings to vehicles over five years old while procuring more inventory from consumers, so it expects EchoPark to have breakeven EBITDA in the first quarter of 2024. A new segment, powersports, offers long-term upside too.

2022 U.S. light vehicle sales per Wards were 13.7 million, an 8.1% decline from 2021 and their worst year since 2011’s 12.8 million. December sales, however, grew 4.9% year over year with the seasonally adjusted annualized selling rate at 13.31 million, up from December 2021’s 12.72 million. The chip shortage rather than poor demand is to blame and we expect one more year of constrained production for the industry. Regardless of high interest rates and average transaction prices over $45,000, we feel U.S. autos have been at recessionary levels for a lot of the time since spring 2020, so we expect 2023 sales to rise by midsingle digits. Gradual improvement in new vehicle inventory should help used vehicle pricing eventually be more affordable for consumers, which is also good for dealers’ used vehicle margins that are currently squeezed by high procurement costs.

Sonic Automotive’s third quarter results looked mostly solid to us and give us no reason to change our fair value estimate. Diluted EPS of $2.23 rose 13.8% year over year and include about a $3 million impact from Hurricane Ian, though Sonic’s Florida stores did not incur severe damage. The EPS did miss the Refinitiv consensus of $2.47 probably due to the hurricane and mostly we think from consensus not able to correctly gauge the impact of expensive used vehicle procurement costs at auction impacting both franchise stores and the EchoPark standalone used vehicle stores. Franchise used vehicle gross profit fell by 9% while EchoPark suffered its sixth straight quarterly pretax loss, this one for $29 million. Total company liquidity seems adequate to us to handle a downturn at $488 million, though $245.2 million of share repurchases this year have lowered that figure from $702.8 million at year end.

Sonic’s second quarter saw all-time record revenue and gross profit, but adjusted diluted EPS from continuing operations of $2.45 still fell short of the $2.55 Refinitiv consensus as did revenue. Management also announced that the strategic review for the EchoPark standalone used vehicle store business, that started a year ago, is over because the board does not find current market conditions favorable for “the value creation objectives for the business.” Management to us sounds open to a future transaction, but we feel the stock market currently treating dealer stocks as if a recession is about to hit is not favorable to a sale or spinoff, so we think stopping the review makes sense. The chip shortage also means very high used vehicle procurement costs, which makes used vehicle profitability much harder than in recent years and also restricts the supply of 1-4-year-old vehicles.

Sonic Automotive is undergoing many changes. Rollout of its omnichannel Digital One Stop process and the CarCash app allows consumers to shop digitally or in-store and helps Sonic procure more used-vehicle inventory. Management has also worked to make the car-buying process nearly paperless, place the customer with only one person for the entire transaction, and enable the customer to take delivery of a vehicle in an hour or less after deciding which one to buy.

Sonic Automotive is undergoing many changes. Rollout of its omnichannel Digital One Stop process and the CarCash app allows consumers to shop digitally or in-store and helps Sonic procure more used-vehicle inventory. Management has also worked to make the car-buying process nearly paperless, place the customer with only one person for the entire transaction, and enable the customer to take delivery of a vehicle in an hour or less after deciding which one to buy.

Sonic Automotive’s first-quarter EPS of $2.33, an 89.4% year-over-year increase, was a first-quarter record but fell short of the Refinitiv consensus of $2.37. We don't see a reason to change our fair value estimate and remain confident that Sonic has a long growth runway in a slowly consolidating yet highly fragmented sector. Same-store franchise dealer revenue rose 4.6% and total same-store franchise gross profit dollars rose 26.9% despite a 14.5% decline in new-vehicle unit sales and a 16.2% decline in used-vehicle sales. These numbers are a function of much higher pricing power at dealerships due to hardly any new-vehicle inventory, which enabled new-vehicle gross profit per unit to rise 134% to $6,799 and used-vehicle GPU to grow 36% to $1,728. Cash is coming back to shareholders with the quarterly dividend more than doubling in 2022 to $0.25 per share and share repurchases in the quarter totaling $76.1 million at an average price of $44.76 per share, by our calculation. We expect strong pricing to continue this year and Sonic’s earnings are typically lowest in the first quarter and highest in the fourth quarter as the latter is a strong time for premium brands.

Sonic Automotive is undergoing many changes. Rollout of its omnichannel Digital One Stop process and the CarCash app allows consumers to shop digitally or in-store and helps Sonic procure more used-vehicle inventory. Management has also worked to make the car-buying process nearly paperless, place the customer with only one person for the entire transaction, and enable the customer to take delivery of a vehicle in an hour or less after deciding which one to buy.

Sonic ended 2021 with record fourth-quarter results and adjusted EPS of $2.66, up 77% year over year, which was well above the $1.85 Refinitiv consensus. We agree with management’s optimism on the call that the next few years could be excellent for the company if automakers can stay disciplined on inventory. Current levels are too low now, though, as lean used-vehicle inventory and high used pricing are pushing some used-vehicle customers into new, which are also in short supply because of the chip shortage. On Feb. 15 Sonic found out, to its surprise, that its February new vehicle inventory allocation from many automakers would be cut due to the chip shortage, but we agree with management that inventory will ebb and flow for a while and be better by the end of 2022.