A Not-So-Super Sonic

A Not-So-Super Sonic

Courtesy of Paul Price

Shares of drive-in restaurant operator Sonic (SONC) have been on a roll (pun intended). The stock rallied from a 52-week low of $6.84 to close at $12.88 on Wednesday, 3/27. Adjusted earnings for the end of the February quarter came in at 5-cents versus 3-cents a year earlier in the seasonally weakest (winter) quarter for this open-air eatery. Same store sales were flattish although 2012 was a leap year with one extra selling day.

Should we be savoring Sonic’s positive momentum or digesting its gains?

Quick service restaurants in general face some major headwinds: minimum wage increases, Obamacare-related costs, and the FICA tax holiday reversion. These factors conspire against profitability. Sonic, in particular, has not shown very good results since FY 2008 (ended Aug. 31, 2008).  

Click to enlarge:

                       SONC  2008 - 2012  data

From FY 2008 through FY 2012, total sales dropped 32.2%. EPS declined by 40%. The share price plunged from a peak of $26.20 in 2007, bottomed and bounced multiple times in 2008, 2009, 2010, 2011 and 2012 to annual highs of $10.90 – $13.10. Each advance proved to be a false start. I wouldn’t bet that this time will be different.

 SONC  Jan. 1, 2007 - Mar. 27, 2013

Company officers have chosen to sell at prices below today’s. Director Federico Pena exited almost $290,000 worth at an average price of $11.58 just days ago. The last insider buy was relatively small and took place more than eight months ago.

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 SONC insider trades

Sonic has a weak balance sheet and no dividend to support its price.

Value Line uses a financial strength rank of ‘C’ as their lowest other than outright default.

SONC - Balance sheet

 

Wall Street research has been busy cheerleading to explain Sonics recent share price action. Barrons just endorsed it as a good buy, while noting it was no longer cheap.

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 SONC - Barrons Take

Why pay 18.4 times the FY 2013 estimate of $0.70 for a serial disappointer in an industry with unfavorable forces working against its success?

If long SONC, I’d take profits.

Disclosure:   No position

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