This Fast-Food Company Is Firing on All Cylinders: Should You Buy?

Sonic is clearly moving in the right direction, and the company has a lot of room for growth as it continues to gain market share versus bigger rivals such as McDonald's and Yum! Brands.

Mar 25, 2014 at 6:00PM

Sonic Image

Source: Sonic.

Sonic (NASDAQ:SONC) was rising by a whopping 10.4% on Tuesday after investors reacted with optimism to the company's latest earnings report. In an industry dominated by stagnant giants such as McDonald's (NYSE:MCD) and Yum! Brands (NYSE:YUM), Sonic is gaining market share, and the company has abundant room for expansion in the years ahead.  

Delicious performance
Sonic reported an increase of 1.4% in systemwide same-store sales during the quarter ended on Feb. 28; same-store sales at franchised drive-ins increased by 1.5% during the quarter, while company drive-ins generated a 1.3% increase in same-store sales.

Management estimates that the unusually cold weather had a negative impact of between 2% and 3% in systemwide sales, but the company's performance was still materially better than the data reported by bigger industry players such as McDonald's and Yum! Brands during recent quarters.

Earnings per share for the quarter came in at $0.07, a 40% increase versus earnings excluding extraordinary items in the same quarter of the prior year, and better than the $0.06 per share forecast on average by Wall Street analysts.

Even better, guidance for fiscal 2014 was quite strong. Management expects earnings per share to increase in the range of 14% to 15%, fueled by same-store sales growth in the low single digits, better performance at company drive-ins, and 40 to 50 new franchise drive-ins during the year.

Growth drivers
Management believes the company will be able to generate growth rates in the area of 14% to 20% in earnings per share over coming years, an ambitious target that would position Sonic as growth leader in its industry.

Menu innovations, a layered day-part promotional strategy, increased investments in advertising, and better customer service technology via the company's POPS -- point of personalized service -- initiative have been effective tools to generate growing same-store sales over the last several quarters.

In addition, sales leverage and technological innovations in areas such as point-of-sales and supply chain management are generating margin improvements for the company, and management plans to continue increasing margins in the future.

With nearly 3,500 drive-ins in 44 states, the company still has room for growth, and management is planning to increase units by between 2% and 3% per year in the medium term. Besides, the company has successfully increased overall royalty rates for new and renewed contracts lately. As long as sales and profit margins continue moving in the right direction, Sonic should be able to generate growing royalty revenues over time.

Since Sonic implemented its repurchase program in 2012, the company has bought back nearly $125 million in its own stocks, representing approximately 17% of shares outstanding. During fiscal 2014, management is planning to repurchase an additional $80 million, utilizing existing cash on hand and free cash flow.

In the words of CEO Cliff Hudson: "We will continue to focus on our multi-layered growth strategy, which incorporates same-store sales growth, leverage from higher sales, deployment of free cash flow, increasing royalty revenues and new drive-in development to build shareholder value. We believe all of these initiatives will enable us to continue to achieve double-digit earnings-per-share growth in the near and long term."

Sonic Growth Strateghy

Source: Sonic.

A small fish in a big pond
The fast-food industry is generating lackluster growth lately, as the market is quite saturated and many consumers are choosing healthier alternatives. However, Sonic has plenty of room for further growth by gaining market participations versus industry giants such as McDonald's and Yum! Brands.

McDonald's is facing considerable difficulties when it comes to generating growth over the last few quarters, especially in the U.S. This global juggernaut produced total revenues of more than $28.1 billion during 2013, but performance is stagnating as menu innovations have not been enough to reinvigorate sales.

U.S. comparable-store sales declined by 1.4% during the fourth quarter of 2013, and there is no turnaround in sight in the first months of 2014, as McDonald's reported a similar decline of 1.4% in comparable-store sales in the U.S. during February.

Yum! Brands is another example of an industry giant with serious difficulties expanding sales in the U.S. lately. The company made almost $13.1 billion in sales during 2013, but same-store sales in the U.S. were flat for the year, and they even declined by 2% during the fourth quarter. While Taco Bell is generating modest increases in same-store sales, Pizza Hut and KFC are reporting worrisome declines.

With sales of only $110 million in the last quarter, Sonic has a long way to go before it reaches the same level of market penetration as McDonald's or Yum! Brands.

Bottom line
Sonic seems to be clearly moving in the right direction lately, and management has ambitious growth plans based on smart drivers. The company has plenty of room for growth as long as it continues to gain market share versus stagnant giants such as McDonald's and Yum! Brands, so this fast-food chain looks well positioned to continue delivering mouthwatering gains for investors in the coming years.

Boost your 2014 returns with The Motley Fool's top stock
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends and 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers