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BRANDS:

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Sonic (SAH) Continues Expansion With Audi Owings Mills Buyout

Zacks Equity Research
·4-min read

Sonic Automotive SAH recently acquired Audi Owings Mills, which represents the company’s eighth Audi franchise and 112th franchised dealership overall. The dealership, located in Maryland, will serve the residents of the greater Baltimore area. Last year, Sonic had acquired the Volkswagen of Fallston dealership in Maryland. The acquisition of Audi Owings Mills extends Sonic’s association with Volkswagen and seeks to offer consumers more choices in the Maryland market.

Sonic is committed to optimizing its franchised dealership business, both through organic growth initiatives and through strategic acquisitions. The buyout of RFJ Auto Partners, completed in December 2021, is expected to add $3.2 billion to Sonic’s annual revenues, which are incremental to its previously-stated target of $25 billion in total revenues by 2025. With 33 locations in 7 states and a portfolio of 16 automotive brands, the RFJ buyout has substantially boosted Sonic’s portfolio and geographical footprint. The deal has catapulted the firm into the top-five biggest dealership groups in the United States.

While the company’s acquisition of dealerships is likely to boost long-term growth, it may strain the near-term financials of the firm. The auto retailer has been bearing the brunt of rising SG&A over the past several quarters. In the last reported quarter, SG&A rose 26% year over year. Massive expansion plans and the rollout of the new stores may limit operating margins and cash flow, going forward. As it is, the firm doesn’t boast a strong balance sheet. As of Jun 30, 2022, the company’s long-term debt stood at $1,462 against cash and cash equivalents of $327.1 million. Its total long-term debt-to-capital ratio stands at 0.71, higher than its industry's 0.55.  Moreover, the company’s times interest earned ratio of 6.57 is unfavorable compared with the industry’s ratio of 15.36.

Nonetheless, it’s worth retaining the stock in your portfolio. The Zacks Consensus Estimate for SAH’s 2022 earnings implies 16.9% year-over-year growth. The primary catalyst favoring the stock is the company’s EchoPark segment.

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Sonic’s EchoPark segment operates independently from its franchised dealerships business. EchoPark stores seek to provide a wide selection of high-quality used vehicles and a modern shopping experience, with a deep focus on customer satisfaction. The strategic partnership with Cox Automotive and Darwin Automotive to develop a proprietary e-commerce platform and user interface is also speeding up EchoPark’s expansion plans.

The EchoPark unit is the major growth engine of Sonic. The unit witnessed record second-quarter revenues of $665.6 million, up 12% year on year. The strong organic growth fueled by EchoPark expansion is likely to significantly boost Sonic’s prospects. It opened three new EchoPark locations during the second quarter, including two retail hub locations in Raleigh and St. Louis.

The EchoPark brand reached more than 30% of the U.S. population at 2021-end and aims for 90% U.S. population coverage by 2025.  Importantly, Sonic targets 575,000 unit sales with a nationwide distribution network of more than 140 EchoPark stores by mid-decade. It aims to achieve $14 billion in annual EchoPark revenues by 2025, driving toward the annual vehicle sales goal of 2 million units at maturity.

Sonic currently carries a Zacks Rank #3 (Hold). A few better-ranked players in the same space are America’s CarMart CRMT and Rush Enterprises RUSHA.

America's Car-Mart operates automotive dealerships and is one of the largest automotive retailers in the United States, focused exclusively on the Buy Here/Pay Here segment of the used car market. The Zacks Consensus Estimate for CRMT’s fiscal 2023 revenues implies 11.67% growth year on year. The company currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Rush Enterprises operates the largest network of Peterbilt heavy-duty truck dealerships in North America and John Deere construction equipment dealerships in Texas and Michigan. The Zacks Consensus Estimate for RUSHA’s 2022 earnings implies 36.21% growth year on year. The company currently carries a Zacks Rank #2 (Buy).


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