Sonic Expected to Post Profit Growth as Digital Menus Drive Sandwich Sales

By Richard Saintvilus

NEW YORK — Even with a stock price about 50% percent more expensive than its fast-food competitors, drive-in chain Sonic remains a good buy for investors, with same-store sales growth expected to fuel the continuation of more than two years of consecutive quarterly earnings gains.

The Oklahoma City-based company will probably post profit on Tuesday of 12 cents a share, excluding some items, for the three months through Feb. 28, analysts say. That compares with 7 cents a share in the same period last year and reflects sales growth during the period of about 12 percent at stores open at least a year, Sonic said.

Although its approach as a drive-in fast-food chain differs from eat-in restaurants, the company has benefited from the model’s low overhead and the limited number of employees needed per shift to run the restaurant profitably. The success of that strategy is reflected in Sonic’s share price. The stock has soared to a new 52-week high, gaining a stunning 60% in the past year compared with 12% gains for the S&P 500 (SPX) as competition among quick-service restaurant operators sparks not onlymergers and acquisitions but also leadership changes. The S&P restaurant index, which includes McDonald’s (MCD) and Pizza Hut-operator Yum Brands (YUM), posted growth of just 11 percent.
While Sonic shares are no longer cheap — at about 40 times earnings, compared with multiples of 21 for the S&P 500 index and 26 percent for the S&P’s restaurant index — the chain is ramping up its marketing efforts to drive further revenue growth. It’s also embracing a mobile strategy to not only speed up customer orders but cut personnel costs, and installing digital menu boards and new point-of-sale systems.

To the extent these maneuvers expand the company’s margins, investors can expect higher profits, thus justifying Sonic’s premium price-earnings ratio and a higher stock price. In other words, investors would do well to focus more on management’s execution than stock multiples.

At the same time, Sonic’s market is likely to grow more challenging, thanks to new entrants like Chipotle Mexican Grille (CMG) Shake Shack (SHAK), which went public in January, and fast-growing private chains like Five Guys. Working in Sonic’s favor are its roughly 3,500 restaurants in 44 U.S. states. It will be a while before Shake Shack and the likes of Five Guys scale to that level and geographic reach. And Sonic owns roughly 10% of its 3,500 stores, meaning 90% are franchise-owned and, thus, royalty-paying businesses.
That minimizes the risk to Sonic, since costs associated with running the majority of the restaurants belong to the franchise operators. And franchise royalties and license fees soared almost 23% in the three months through November.

Analysts project total revenue will climb 13 percent to $123.6 million in the most recent quarter and that full-year sales may climb 9% to $601 million. All told, analysts, who have assigned the stock a consensus buy rating, according to CNN Money, remain broadly positive about Sonic’s direction, indicating the stock can still feed profit-hungry investors for years to come.