Shares of drive-in fast-food restaurant chain Sonic
The dip in earnings for the quarter was due to increased interest expense and debt refinancing charges. The company refinanced a bank loan and took on additional debt to repurchase more than $400 million in shares, or 20% of outstanding stock. The effects are expected to carry over into the second quarter, and they could increase interest expense for some time. Nonetheless, Sonic has a solid historical track record of growth, with continued bright prospects.
Earnings and sales have grown right around 17% each year for the past five years, and they've been consistent on an annual basis. Operating cash flow has grown close to 20% over the past couple of years, exceeding reported net income by a wide margin. Sonic doesn't really need any debt, since it generates more capital internally than it spends to maintain and grow its store base. That's primarily because more than 80% of the store base is franchised, leaving spending requirements to outside parties, and generating subsequent high-margin franchise royalties.
Management targets annual earnings growth of 18%, predicting further growth in the current 33 states where stores are located. With only about 3,200 locations currently, Sonic should be able to continue growing in the double digits for the foreseeable future. As a comparison, McDonald's
Domestically, the drive-in concept does offer some form of differentiation in the crowded fast-food realm of dining out, which also includes Jack in the Box
In any case, Sonic has put together a solid string of top- and bottom-line growth, and it generates decent levels of cash flow. Fools looking for restaurant exposure in their portfolios may want to consider a bite out of Sonic, since its future outlook also looks tasty.
For related Foolishness:
Only three days left in this season's Foolanthropy campaign! Visit www.foolanthropy.com to learn about five reader-nominated charities and make a donation.
Hungry for financial advice? Whatever your taste in investment, the Fool's menu of newsletters has something tasty for you. Nibble on any of our premium newsletter services free for 30 days.
Fool contributor Ryan Fuhrmann is long shares of Mickey D's but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.