Needham cuts Sonic Auto target to $93, keeps Buy rating

Wednesday - Needham analysts have revised the price target for Sonic Automotive (NYSE: NYSE:SAH) shares, reducing it to $93.00 from the previous $100.00, while still recommending a Buy rating for the stock. Currently trading at $59.81 with a P/E ratio of 9.36x, InvestingPro data suggests the stock is trading below its Fair Value. The adjustment comes in response to recent observations from the firm’s Echo Park inventory tracker.

The analysts noted that similar patterns were detected back in October, which resulted in a lower-than-anticipated performance for Sonic Automotive’s Echo Park segment in the fourth quarter of 2024. This has led to a downward revision of first-quarter 2025 used retail estimates for both Sonic Automotive’s franchise and Echo Park stores. Despite this, the analysts expressed continued optimism for the used auto market, acknowledging recent positive shifts in wholesale data. The company maintains strong fundamentals with $14.2 billion in revenue and an EBITDA of $603.8 million over the last twelve months.

However, they also anticipate a less smooth recovery, which has now been incorporated into their projections. The new $93 price target is based on an enterprise value of $7.8 billion, which includes $7.7 billion for Sonic Automotive’s franchise dealerships, valued at 10 times the forecasted fiscal year 2025 adjusted EBITDA for the standalone franchise, and $154 million for Echo Park, valued at 5 times the forecasted fiscal year 2025 adjusted EBITDA, a decrease from the previous 10 times fiscal year 2026 estimate. InvestingPro analysis reveals additional insights about SAH’s valuation and growth prospects, with 12 exclusive ProTips available for subscribers.

The analysts applied a 25% sum-of-the-parts (SOTP) discount to account for Echo Park’s relative size within the Sonic Automotive portfolio. With a current market capitalization of $2.02 billion and a debt-to-equity ratio of 3.89x, this valuation reflects the analysts’ recalibrated expectations for the company’s segments and the broader industry context impacting Sonic Automotive’s operations.

In other recent news, Sonic Automotive reported impressive fourth-quarter results, surpassing analyst expectations. The company achieved an adjusted earnings per share of $1.51, exceeding the projected $1.46, while revenue reached a record $3.9 billion, well above the anticipated $3.6 billion. The Franchised Dealerships segment was a key driver, with revenues increasing by 12% year-over-year to $3.4 billion. Although the EchoPark segment experienced a 9% decline in revenue to $506.2 million, it recorded a 14% year-over-year rise in gross profit to $49 million. For the full year 2024, Sonic reported $14.2 billion in revenue, a 1% decrease from the previous year, and adjusted earnings per share of $5.60, down 18% year-over-year.

In other developments, Needham analysts raised their price target for Sonic Automotive to $100 from $74, maintaining a Buy rating. The increase reflects confidence in Sonic’s franchise operations and the potential growth of the EchoPark segment. Needham’s valuation of Sonic Automotive is based on an enterprise value of $8.1 billion, with a significant portion attributed to the franchise dealerships. The analysts see potential growth in EchoPark despite previous inventory issues, suggesting the market has not fully recognized its value.

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