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Sonic's Drive-In Charm Continues to Shine

Michael Lewis
January 7, 2014

Throwback-style drive-in Sonic (NASDAQ: SONC) delighted investors this week by reporting better-than-expected earnings and encouraging forecasts going forward. The fast-food business, which is expanding aggressively on both U.S. coasts, is seeing more traffic with the bonus of well-managed costs. As a result, all sales figures rose attractively and sent the stock up nearly 5% in Tuesday's trading. The question for investors now is whether the company's forward earnings ratio of more than 20 times is a fair price to pay for the expected growth. Let's take a closer look at earnings to look for clues.

Earnings recap
In the company's fiscal 2014 first quarter, Sonic hauled in $126.6 million in revenue -- roughly half a million dollars more than the prior year. While the top-line sales gain wasn't much, net income of $8.2 million showed a substantial improvement over 2013's $6.1 million. Driving the gains was a mixture of both same-store sales -- up more than 2% for the quarter -- and new stores.

On the same-store sales front, franchised drive-ins led the pack with 2.3% growth, while the company-owned stores trailed slightly at 1.9%. The company's focus remains on franchised stores, as evidenced by the seven new franchises opened in the quarter versus just one in the year-ago quarter.

Looking ahead, things are even better. Management is targeting around 15% growth in EPS throughout fiscal 2014, again driven by new-store growth and same-store sales performance. Company drive-ins should see their sales improve as Sonic is installing new point-of-sale and point-of-purchase systems. Margins should also be boosted in the range of 75 to 100 basis points.

Sonic is looking to earn $15 million to $25 million in free cash flow for the full year.