Morningstar

Sonic Enters Powersports Market, Ends 2022 in Solid Position

Fourth-quarter adjusted diluted EPS declined year over year but still beat consensus.

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Securities In This Article
Sonic Automotive Inc Class A
(SAH)

Sonic Automotive SAH 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 stand-alone stores, declined 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.

We find management’s 2023 U.S. light-vehicle sales assumption of 14.5 million-15.1 million or higher reasonable, though the higher end is a bit more optimistic than we are. Much uncertainty remains due to the cadence of inventory recovery from the chip shortage, and how much new-vehicle gross profit per unit, which was $6,130 in the fourth quarter, will fall in 2023 is a key question. Sonic sees its metric falling possibly to around $4,800 by year-end, but this trend affects every retailer in 2023 due to recent years’ profits being vastly inflated by the chip shortage.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

David Whiston, CFA, CPA, CFE

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist, AM Industrials, for Morningstar*. He covers stocks in the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007. He writes stock reports, ad hoc reports, stock analyst notes, and builds discounted cash flow models for each company covered. He also assesses their economic moat and makes frequent television and print media appearances in local, national, and international news outlets. Key stocks covered include GM, Ford, CarMax, and all six publicly traded franchise auto dealers, such as AutoNation and Penske Automotive Group.

Before joining Morningstar in 2007, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence, gaining experience around assessing an asset’s cash flow.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond’s Robins School of Business. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner.

In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011 .

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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