S&P 500 eases slightly from fresh record high after stronger economic growth
Wednesday, Citi initiated coverage on Sonic Automotive, Inc. (NYSE:SAH), a $2.1 billion market cap auto dealer, with a Neutral rating and set a price target of $64. According to InvestingPro data, the company currently trades at a P/E ratio of 9.5x, suggesting attractive valuation metrics relative to near-term earnings growth. The firm’s analysis highlighted Sonic Auto’s position as the smallest among the six public auto dealers, with a significant portion of its new vehicle brand mix—40%—comprised of BMW (ETR:BMWG) and Mercedes vehicles. The analysis pointed out that while this German luxury mix has historically been beneficial for the company’s performance, generating an EBITDA of $603.8 million in the last twelve months, the fact that 48% of unit sales from these brands were imported in 2024 raises concerns about potential price increases due to tariffs.
Sonic Automotive’s gross profit from selling new vehicles at retail in 2024 represented 18% of the company’s total gross profit, which was noted as the second lowest in its comparison group. However, the Finance and Insurance (F&I) segment accounted for 32% of the company’s gross profit, the highest in the group. The coverage suggests that Sonic Auto, along with other auto retailers, may not be as affected by tariffs as the market currently perceives. However, the product mix is expected to remain a point of concern until tariff discussions are resolved.
The report also mentioned potential restructuring actions at EchoPark, Sonic Auto’s standalone used vehicle operations. These changes could potentially benefit from higher tariffs, possibly leading to an increased demand for used vehicles. Notably, the company has maintained dividend payments for 16 consecutive years, demonstrating financial stability despite market fluctuations. Citi’s analysts anticipate that dealer group multiples will revert to historical levels once there is more clarity on tariffs, and they expect Sonic Auto’s stock to trade in line with its peer group.
Citi’s price target of $64 for Sonic Auto is based on the lower end of their multiple range, averaging out the enterprise value to EBITDA (EV/EBITDA) of 9.6x and price-to-earnings (P/E) metrics. The firm’s estimates for Sonic Auto are 10% below the consensus estimates on the street. Get comprehensive insights into Sonic Automotive’s valuation and growth potential through the detailed Pro Research Report, available exclusively on InvestingPro.
In other recent news, Sonic Automotive reported impressive fourth-quarter results, surpassing expectations with adjusted earnings per share of $1.51, compared to analyst estimates of $1.46. The company achieved a record quarterly revenue of $3.9 billion, exceeding the forecasted $3.6 billion, driven by a 12% year-over-year increase in the Franchised Dealerships segment. Although the EchoPark used vehicle segment experienced a 9% decline in revenue to $506.2 million, it posted a record quarterly gross profit of $49 million, up 14% year-over-year. Sonic Automotive also reported full-year 2024 revenues of $14.2 billion and adjusted earnings per share of $5.60. Needham analysts have recently adjusted their outlook on Sonic Automotive, initially raising their price target to $100 due to confidence in the franchise operations but later reducing it to $93 following revised projections for the Echo Park segment. Despite the adjustment, Needham maintained a Buy rating, reflecting ongoing optimism for the used auto market and Sonic’s growth prospects. The company’s Board of Directors approved a quarterly cash dividend of $0.35 per share, payable in April 2025.
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