Please ensure Javascript is enabled for purposes of website accessibility

Why Sonic Automotive Stock Is Up 69% So Far in 2019

By John Ballard - Updated Jul 8, 2019 at 12:04PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The auto dealership operator has found a winning formula in pre-owned vehicles.

What happened

Shares of Sonic Automotive (SAH -8.38%) soared 69.7% in the first half of the year, according to data provided by S&P Global Market Intelligence.

Sonic is one of the largest auto retailers in the country, but sales haven't grown much in recent years, and neither have earnings. This is why the stock typically trades at a low valuation; it entered the year trading for less than 8 times this year's consensus earnings estimate. 

A woman holds up the keys to a new car at a dealership.


However, investors quickly saw a bargain and sent the stock higher after Sonic's first-quarter earnings report showed its EchoPark pre-owned vehicle chain is growing by leaps and bounds and could significantly improve the company's profitability.

So what

EchoPark generated revenue of $249.6 million in the last quarter, marking an increase of 90% year over year. It's a small but fast-growing chain that accounts for only about 10% of the company's total revenue, but management said EchoPark is on track to bring in more than $1 billion in revenue this year. 

Auto dealerships are extremely competitive, which is why Sonic generates razor-thin margins. The company's total net income last quarter was only $42 million on about $2.4 billion in total revenue. But EchoPark's successful formula of delivering what the company describes as Costco-like deals for car buyers could significantly raise Sonic's growth profile. 

Not only is the pre-owned chain growing fast, it became profitable for the first time. EchoPark generated a profit of $0.2 million before taxes last quarter. That doesn't seem like much, but consider that EchoPark is quickly scaling, generating 28.7% of Sonic's consolidated pre-owned unit sales last quarter. 

But the thing that clearly got investors excited about the company's growth prospects is what CEO David Smith said about EchoPark's long-term potential

As we expand our footprint into other areas across the country, we believe EchoPark will exceed the overall volumes and profitability of our franchised dealerships.

Now what

The company doesn't provide guidance, but analysts currently expect Sonic to report full-year adjusted earnings per share of $2.04, which would mark growth of 15% over 2018. Analysts expect total revenue to be up by 0.70% to reach $10.02 billion. 

The stock's forward P/E has increased from less than 8 to 11.25 in the last few months, which constitutes most of the stock's return in the first half of 2019. Investors believe the expansion of EchoPark is what the company needs to sustain growth over the long term. If EchoPark continues to grow its profit contribution, as management expects, there could be further upside to the stock.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Sonic Automotive, Inc. Stock Quote
Sonic Automotive, Inc.
$43.69 (-8.38%) $-4.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.