On Friday, Seaport Global Securities made a bullish move on Sonic Automotive (NYSE:SAH), upgrading the company's stock from Neutral to Buy and setting a price target of $74.00. The upgrade comes amid a broader analysis of the franchise auto retailer sector, which Seaport believes is undervalued even after a year of solid stock performance.
According to the Seaport analyst, franchise auto retailers are trading at approximately 10 times the firm's 2025 earnings per share (EPS) estimates. This valuation is less than half the market multiple, which closed at 46.3% on Friday. The analyst suggests that a normalized relative multiple would imply a price-to-earnings (P/E) ratio of 12.0x for the sector, arguing that the profitability and cash flow profile of these companies now justifies a higher valuation multiple.
The analyst pointed out the improvement in net margins for the group from pre-pandemic levels in 2017 to the post-pandemic period, anticipated for 2025. This improvement, they say, supports the argument for a more generous valuation.
In light of this analysis, Seaport Global has also increased its price targets for other players in the auto retail sector, including AutoNation (NYSE:NYSE:AN), Group 1 Automotive (NYSE:NYSE:GPI), Lithia Motors (NYSE:NYSE:LAD), and Penske Automotive Group (NYSE:NYSE:PAG), applying a 12x P/E multiple for valuation purposes, and a 13x multiple specifically for Lithia Motors.
The bullish stance on Sonic Automotive is tempered by a more cautious view on Asbury (NYSE:ABG) Automotive Group (NYSE:ABG), which Seaport downgraded last week to Neutral. The downgrade was due to an expected non-cash EPS headwind from growth in TCA, which the firm believes is not yet adequately reflected in consensus estimates. Despite the potential for a bullish case for ABG shares, Seaport anticipates that they may underperform compared to their peers.
In other recent news, Sonic Auto reported mixed third-quarter results, with record gross profit and adjusted EBITDA in its EchoPark segment, despite a 38% year-over-year decline in adjusted EPS. The company's franchise business performance varied, with potential challenges indicated by the initial fiscal year 2025 retail gross profit per unit (GPU) guidance. However, optimism is seen in the company's service business, expected to benefit from an expanding technician base and ongoing original equipment manufacturer (OEM) warranty work.
Needham, a financial analyst firm, raised its stock price target for Sonic Auto from $73 to $74, maintaining a Buy rating. This adjustment reflects confidence in Sonic Auto's recent performance, particularly the growth and improved profitability in its EchoPark used vehicle segment. The new price target is based on a projected enterprise value of $6.5 billion, with $5.5 billion attributed to Sonic Auto's franchise dealerships and $1 billion to the EchoPark segment.
Despite operational disruptions and challenges with new vehicle margins, Sonic Auto remains optimistic about the potential for growth, particularly in the EchoPark and Powersports segments. The company also announced a 17% increase in its quarterly cash dividend to $0.35 per share. These recent developments underscore Sonic Auto's resilience in navigating market fluctuations and its focus on long-term growth.
InvestingPro Insights
The recent upgrade of Sonic Automotive (NYSE:SAH) by Seaport Global Securities aligns with several key metrics and insights from InvestingPro. The company's P/E ratio of 10.94, which is close to the sector valuation mentioned in the article, supports Seaport's view that the stock may be undervalued. This is further reinforced by SAH's strong performance, with a 16.45% price return over the past month and a 23.67% return over the last year.
InvestingPro Tips highlight that Sonic Automotive has maintained dividend payments for 15 consecutive years and has raised its dividend for 4 consecutive years. This demonstrates the company's financial stability and commitment to shareholder returns, which could be attractive to investors looking for both growth and income. The dividend yield currently stands at 2.22%, with a notable dividend growth of 20.69% in the last twelve months as of Q3 2024.
However, investors should be aware that SAH operates with a significant debt burden, which could impact future financial flexibility. Additionally, the company suffers from weak gross profit margins, which stood at 15.52% in the last twelve months as of Q3 2024. These factors may explain why the stock is trading at a discount despite its strong performance.
For those interested in a deeper analysis, InvestingPro offers 10 additional tips for Sonic Automotive, providing a more comprehensive view of the company's prospects and challenges.
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