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Shares of Sonic Automotive, Inc. SAH, a leading automotive retailer in the United States, have risen roughly 14% year to date, outperforming the Zacks Automotive – Retail and Wholesale industry’s growth of 4.3%. The company’s portfolio and geographical footprint have positioned it into the top five biggest dealership groups in the United States, underpinning its growth during affordability concerns.
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What’s Working in Favor of Sonic?
The company’s diversified product mix and multiple streams of income from the sale of new and used vehicles, parts/services and finance/insurance businesses reduce the risk profile and augur well for earnings and sales growth. The buyout of RFJ Auto Partners (completed in 2021) has boosted Sonic’s portfolio and geographical footprint, catapulting the firm into the top five biggest dealership groups in the United States. The acquisition of Audi New Orleans (completed in December 2024) adds to the company's varied lineup of automotive brands.
Sonic's investment in digital capabilities, including a strategic partnership with Cox Automotive and Darwin Automotive to develop a proprietary e-commerce platform, is encouraging. The platform's significant traffic and progress in national rollout indicate continued growth in the long term.
After three years of industry-driven headwinds, Sonic’s EchoPark segment returned to positive adjusted EBITDA in the first quarter of 2024 and reported record adjusted EBITDA in the third quarter of 2024. Sonic expects continued positive adjusted EBITDA in the upcoming quarters, driven by the advantages of a smaller store footprint, leading to increased unit volume throughput per store and better-used vehicle gross profit per unit (GPU).
Sonic's 'Net 300 Initiative', aimed at hiring 300 additional technicians, will allow the company to service growing demand as the sales volumes of both new and used vehicles recover from pandemic lows. This is projected to boost SAH’s annual fixed operations gross profit by $100 million.
Sonic’s commitment to returning value to shareholders is praiseworthy. Sonic has increased its dividend six times in the last five years, the annualized dividend growth being 36.7%. Alongside its Q3 earnings results, SAH announced a 17% increase in its dividend payout. Its ROE of 21% is higher than the auto sector’s 10%, underscoring management’s efficiency in generating profits, which secures future cash flows to investors.
Near-Term Headwinds Clouding SAH’s Prospects
Used car retail prices remain elevated, posing affordability concerns for consumers, especially amid high interest rates. This may deter potential buyers and impact the company's ability to maintain or increase profitability in the used vehicle business. In the third quarter of 2024, retail used vehicle volumes in the Franchised Dealership and EchoPark segments declined 2% and 7%, respectively.
The company's stretched balance sheet plays spoilsport. As of Sept. 30, 2024, SAH’s long-term debt was $1.6 billion, quite high compared to the cash and cash equivalents of a mere $17.6 million. Its long-term debt-to-capital ratio stands at 0.65, higher than the auto sector’s 0.25. Moreover, the company’s times interest earned ratio of 2.14 is unfavorable compared with the sector’s ratio of 12.55.
The pressure EVs place on gross profit per unit (GPU) is concerning for Sonic. The company reported significant GPU headwinds from EVs across the first three quarters of the year, with impacts of $400 in Q1, $170 in Q2 and $440 in Q3. The boost from higher second-quarter incentives dissipated in Q3, leading to a return to more typical GPU levels. Third-quarter GPU from same-store new vehicle sales dropped to $3,049 per unit, down $540 from the second quarter due to greater profit pressures from increased EV sales and stop-sale orders affecting certain high-margin models. Challenges to achieve better GPU levels in the EV segment persist.