Oil-Price Drop Isn’t Tonic for Sonic
Sonic shares have momentum, but geography and valuations provide a risk
A Sonic Corp. drive-in restaurant in Normal, Ill. PHOTO: DANIEL ACKER/BLOOMBERG NEWS
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Up nearly fourfold since 2012, it seems like Sonic Corp. warrants a snazzy prefix, perhaps “super” or even “hyper.”
Gaudy share-price gains among quick-serve eateries are common these days, of course, as nimble new ones, including Shake Shack Inc. and El Pollo Loco Holdings Inc., surged on their debuts.
But Sonic is a fresh face. Older by a couple of years than McDonald’s Corp., it is more likeKrispy Kreme Doughnuts Inc., a rejuvenated regional chain. It actually has two more things in common with that company. First, it experienced blinding stock-market gains, a painful retreat and a renaissance in the past 15 years. Second, it depends heavily on franchises, a boon for rapid expansion.
Sonic certainly has momentum after registering comparable-store sales growth of 8.5% and 11.5% for its first and second fiscal quarters, respectively. Its fiscal third quarter through May, to be reported Monday, could look a little softer.
Over a third of Sonic’s drive-in or drive-through-style restaurants are in three oil-producing states where discretionary spending might suffer from the industry’s slump. And two of them were hit by unusually heavy rain and flooding. Analysts see Sonic reporting earnings per share of 36 cents, up from 30 cents a year earlier.
Even if geographic factors don’t cause a hiccup, they create some constraints for the chain. While there are some Sonic restaurants in places with cold winters, six populous states in the Northeast or Midwest have only 54 combined. There are four times as many in Tennessee alone and almost 18 times as many in Texas.
The more important issue, though, is valuation. Sonic surged a decade ago and saw its forward earnings multiple peak in 2006 at just under 25 times. Then it hit a rough patch and revamped advertising, including the highly successful and memorable “Two Guys” series done by improvisational comedians.
One has to chuckle at today’s valuation of over 26 times, though, for a chain that hasn’t even recovered all the ground it lost financially. Earnings per share last year were a cent less and revenue a fifth lower than they were in 2006.
Sonic’s supersonic climb has only followed a terrifying stall. Investors late to the party should keep on driving.
