Shares of Sonic Automotive, Inc. SAH,  a leading automotive retailer in the United States, have risen roughly 14% year to date, outperforming the Zacks Automotive – Retail and Wholesale industry’s growth of 4.3%. The company’s portfolio and geographical footprint have positioned it into the top five biggest dealership groups in the United States, underpinning its growth during affordability concerns.

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What’s Working in Favor of Sonic?

The company’s diversified product mix and multiple streams of income from the sale of new and used vehicles, parts/services and finance/insurance businesses reduce the risk profile and augur well for earnings and sales growth. The buyout of RFJ Auto Partners (completed in 2021) has boosted Sonic’s portfolio and geographical footprint, catapulting the firm into the top five biggest dealership groups in the United States. The acquisition of Audi New Orleans (completed in December 2024) adds to the company's varied lineup of automotive brands.

Sonic's investment in digital capabilities, including a strategic partnership with Cox Automotive and Darwin Automotive to develop a proprietary e-commerce platform, is encouraging. The platform's significant traffic and progress in national rollout indicate continued growth in the long term.

After three years of industry-driven headwinds, Sonic’s EchoPark segment returned to positive adjusted EBITDA in the first quarter of 2024 and reported record adjusted EBITDA in the third quarter of 2024. Sonic expects continued positive adjusted EBITDA in the upcoming quarters, driven by the advantages of a smaller store footprint, leading to increased unit volume throughput per store and better-used vehicle gross profit per unit (GPU).

Sonic's 'Net 300 Initiative', aimed at hiring 300 additional technicians, will allow the company to service growing demand as the sales volumes of both new and used vehicles recover from pandemic lows. This is projected to boost SAH’s annual fixed operations gross profit by $100 million.

Sonic’s commitment to returning value to shareholders is praiseworthy. Sonic has increased its dividend six times in the last five years, the annualized dividend growth being 36.7%. Alongside its Q3 earnings results, SAH announced a 17% increase in its dividend payout. Its ROE of 21% is higher than the auto sector’s 10%, underscoring management’s efficiency in generating profits, which secures future cash flows to investors.

Near-Term Headwinds Clouding SAH’s Prospects

Used car retail prices remain elevated, posing affordability concerns for consumers, especially amid high interest rates. This may deter potential buyers and impact the company's ability to maintain or increase profitability in the used vehicle business. In the third quarter of 2024, retail used vehicle volumes in the Franchised Dealership and EchoPark segments declined 2% and 7%, respectively.

The company's stretched balance sheet plays spoilsport. As of Sept. 30, 2024, SAH’s long-term debt was $1.6 billion, quite high compared to the cash and cash equivalents of a mere $17.6 million. Its long-term debt-to-capital ratio stands at 0.65, higher than the auto sector’s 0.25.  Moreover, the company’s times interest earned ratio of 2.14 is unfavorable compared with the sector’s ratio of 12.55.

The pressure EVs place on gross profit per unit (GPU) is concerning for Sonic. The company reported significant GPU headwinds from EVs across the first three quarters of the year, with impacts of $400 in Q1, $170 in Q2 and $440 in Q3. The boost from higher second-quarter incentives dissipated in Q3, leading to a return to more typical GPU levels. Third-quarter GPU from same-store new vehicle sales dropped to $3,049 per unit, down $540 from the second quarter due to greater profit pressures from increased EV sales and stop-sale orders affecting certain high-margin models. Challenges to achieve better GPU levels in the EV segment persist.

Retain SAH Stock in Your Portfolio

Despite near-term headwinds, the company’s solid fundamentals make it worth holding for investors. Its strong growth outlook, driven by its diversified business model, strategic acquisitions and digital investments, augurs well. The company’s positive performance in the EchoPark segment and robust shareholder returns, including consistent dividend hikes, add to its appeal. While challenges like affordability concerns, high debt and margin pressures from EVs exist, Sonic’s ability to adapt and expand its operations positions it well for future growth. 

The Zacks Consensus Estimate for SAH’s 2025 sales and earnings is expected to rise 3.25% and 9.52%, respectively. Earnings estimates for 2025 have been revised upward by a penny over the past 60 days. 

SAH currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the auto space are Dorman Products, Inc. DORM, Geely Automobile Holdings Limited GELYY and Blue Bird Corporation BLBD, each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for DORM’s 2024 sales and earnings suggests year-over-year growth of 3.66% and 51.98%, respectively. EPS estimates for 2024 and 2025 have improved 75 cents and 88 cents, respectively, in the past 60 days.

The Zacks Consensus Estimate for GELYY’s 2024 sales and earnings calls for year-over-year growth of 51.88% and 216.67%, respectively. EPS estimates for 2024 and 2025 have improved by a penny and 12 cents, respectively, in the past 30 days. 

The Zacks Consensus Estimate for BLBD’s fiscal 2025 sales and earnings indicates year-over-year growth of 10.97% and 12.14%, respectively. EPS estimates for fiscal 2025 have improved 18 cents in the past 30 days.

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