Sonic Corp. (SONC) the Oklahoma City based operator of more than 3,500 drive-in, quick service restaurants earned twenty-four cents per share in the 3rd quarter of fiscal year 2012, beating consensus estimates by two cents. Revenue for the quarter was down 1.75% year-over-year, and right inline with estimates for the quarter. Same-store sales increased 2.8%, with sales at company owned locations increasing 3.7%. The company believes that low single digit same store sales growth will produce double digit earnings growth. In future quarters same store sales growth, margin expansion, and effective use of free cash flow will drive double digit EPS growth for some time. Longer term growth will be fueled by new store development and ascending franchise royalties.
Sonic currently trades at about 16.5 times estimated fiscal year 2012, and 14.3 times fiscal year 2013 earnings. Both fiscal year 2012 and 2013 have been revised higher by three cents over the past 90 days. The company has a high level of debt, with over $500 million in debt. Debt is currently just over 4 times EBITDA, and the company is targeting lower that ratio to 3 times by both increasing EBITDA and paying down debt. Even with a high level of debt, the company looks to be in a strong financial position. Sonic has a current ratio of 1.5, and over the past 12 month had operating cash flow of almost $85 million compared to interest expenses of about $30 million dollars.
The negative on the company is that there is very little growth. Top line revenue is projected be down slightly this year, and only projected to increase about 1% next year. New store are also being added at a slow rate, in the 4th quarter Sonic will add 15 to 20 new franchise locations. The company has limited locations in the northern states, as well as on the west coast. Over 25% of Drive-ins are in Texas, and over 50% are in five states.
The chart of Sonic has been almost vertical since the beginning of May, a move that has taken the stock up almost 40% in the past month and a half. This move has pushed the stock quickly past resistance at around $8.50, and the next point of resistance would be around $11.75. Past resistance at $8.50 could act as support and it might be wise to consider waiting for a pullback to that level before going long Sonic. However it appears the stock is set to return to the highs of a year ago and test what might prove to be strong resistance just before $12 per share. A move to the highs from May of 2011 would return over 22% from current levels.
Data sourced from: Company filings, and Yahoo!Finance. Chart from: Freestockcharts.com
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.