Is Sonic One of the Fast-Food Industry's Top Picks?

The drive-in (and -thru) burger-and-shake slinger is growing at a fast clip and improving operating efficiency. What's not to like?

Mar 25, 2014 at 2:48PM

Retro-oriented fast-food purveyor Sonic (NASDAQ:SONC) is one of the industry's top picks. The company is one of few that is able to sustain solid sales growth during times where most businesses cling to adverse weather and a cautious consumer as reasons for poor performance. In its earnings report this week, the company delivered figures that were largely in line, yet the market rallied behind a $0.01-per-share beat and sent the stock up more than 7% in after-hours trading. Year-over-year growth was robust, and looking forward, the company should be easily able to post continued double-digit earnings growth. While in no way a value stock, Sonic is better priced than some of its peers. Here's why you should take a look.

Rollin' in the dough
Led by decent gains in same-store sales and margin expansion, Sonic grew its earnings an adjusted 40% to $0.07 per share. With certain tax charges and benefits included from 2013's results, the gain was 17% -- still formidable considering that management estimates the adverse weather affected same-store sales by 2%-3%.

Same-store sales still posted an overall 1.4% gain. Franchise stores posted slightly higher figures, while company-owned ones were a hair lower. Management has a multipillar growth strategy but puts the main focus on growing same-store sales via marketing initiatives and products that are tailored to get people in the restaurants and drive-thrus throughout the day -- such as snacks and shakes between meals.

Sonic has also invested in new point-of-sale systems and has already implemented a supply-chain management upgrade, which management believes was instrumental in aiding margins. In the recent quarter, drive-in margin expanded about 80 basis points.

Why it works
Sonic has been able to separate itself from the pack by offering a unique product portfolio. In today's fast-food landscape, big players such as McDonald's are hit-or-miss with new product introduction, such as the ill-fated Mighty Wings. Sonic has expanded its menu greatly, but seems to center on its huge variety of beverages. In the spring and summer seasons, the company pushes slushes (flavored-ice beverages) and shakes.

Sonic is also a quickly growing business, with plans to sign on 150 new franchise commitments this year alone that will fuel expansion for years to come. Last quarter, the company opened six new locations. Annual net growth in locations is targeted at 2%-3%.

On a valuation basis, the company isn't cheap at 21 times forward earnings. It won't be on the menu for value investors, but the stock compares favorably to two highfliers in the industry: Burger King Worldwide and Wendy's -- which trade at 23.7 times  and 22.5 times, respectively. Burger King has the added benefit of major international expansion, but Sonic's guidance for roughly 15% earnings growth this year puts it on just as good a level as Burger King.

All in all, there isn't much not to like about Sonic. The company is becoming more efficient while expanding comfortably via a time-tested model -- the capital light, cash-flow-focused franchise model. Investors interested in reliable growth stories, take a close look here.

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Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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