Sonic Automotive: Improved Results, Growth Prospects Intact

Sonic Automotive's (SAH) fourth quarter earnings (from continuing operations) of $28.4 million, or $0.63, were slightly better than my forecast for $26.9 million, or $0.62. Similar with many of the company's peers, Sonic had a pretty big loss from discontinued operations ($6.3 million pre-tax) although it is actually less than the loss from discontinued operations last year in the fourth quarter ($6.7 million). So any way you slice it, Sonic demonstrated improved year-over-year results.

Guidance for $2.48 to $2.58 (versus $2.22 in 2006) is pretty encouraging considering it does not include acquisitions. I still think management is doing a great job of centralizing and standardizing a host of systems and processes, which ultimately should make their employees more productive. Today's results are simply another affirmation of the company's progress being made on this front, so I really don't see anything that has changed with respect to Sonic's long term growth prospects.

The only thing that kind of stuck out to me was the company acquisition target is a range of 10% to 15%. This seems a little higher than what they were articulating a year ago, but I understand consistent with management's recent investor presentations.

Snapshot of Sonic's Results

4Q06 Total same-store sales: up 2.7%

New: 4.3% (retail,) 3.1% (fleet,) 4.2% (total)

Used: 3.4%

Parts and service: 3.1% (retail)

F&I: 4.4%

4Q06 Gross profit: 15.6% unchanged from 15.6% in the prior year period

New: 7.3%, down 20 basis points from the prior year period.

Used: 9.4%, down 90 basis points from 10.4% in the prior year period.

Parts and service: 50.4%, up from 49.7% in the prior year period.

SG&A as a percent of gross: 73.9%, down 82 basis points from 74.7% in last year's fourth quarter.

Personnel expenses as a % of gross profits were down more than 1 full percentage point (year over year) to 42.3%.

Advertising was up as a % of gross profits (about a quarter of a percent) to 5.3%.

Facility rent as a % of gross profits was up 40 basis points to 8%.

Other SG&A expenses as a percent of gross profits were down 40 basis points to 18.2%.

Tax rate: 41.5% versus 38.7% last year

Share count: 46.902 million versus 45.578 million last year.

Long-term debt/cap: 39.5%, (net of cash,) versus 46%

Key takeaway from the release

President Jeff Rachor said:

We are proud of the operating progress we made in 2006. As we look ahead to 2007, we believe our standardized processes, continued operating execution, and lower leverage put us in a favorable position for disciplined growth. Specifically, we expect to add to our luxury and import brand mix by targeting acquisitions of 10% to 15% of annual revenues in 2007. This acquisition growth is not included in our 2007 earnings guidance.

SAH 1-yr chart: