Sonic Automotive Earnings: Stock’s 10%-Plus Fall Seems an Overreaction to Us

Sonic Automotive’s SAH 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.

Dealers are seeing year-over-year profit declines as new-vehicle gross profit margins moderate from record levels during the chip shortage. Sonic’s franchised stores followed that trend, with new-vehicle gross profit per unit down 19% to $5,463 and total retail new-vehicle gross profit down 20%, despite 6% growth in retail new-vehicle revenue on flat volume. Total revenue at the franchise stores fell 1%. Used vehicles fell 10% on continued affordability problems caused by the chip shortage, which should improve later this year. Service revenue growth was excellent, though, at 11%, and posted all-time record quarterly gross profit as consumers are realizing deferred maintenance from the pandemic.