Sonic Automotive: Online Presence Expansion, Inorganic Growth, Very Undervalued

seekingalpha09-13

Sonic Automotive is investing in online platforms and dealership acquisitions, enhancing customer experience and expanding revenue growth across the U.S.The decline in late-model used vehicles and ...

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Luis Alvarez/DigitalVision via Getty Images Sonic Automotive, Inc. (NYSE:SAH) continues to report investments in its online car dealership platforms, which may enhance future customer online experience and efficient marketing. In addition, with access to debt financing, I think that SAH is in a good position to acquire other car dealers, or open new stores in new regions in the U.S. Finally, in my view, the recent decline in the number of late-model used vehicles could have a beneficial effect on the valuation of the car inventory owned by SAH. There are risks coming from the total amount of debt, failed inorganic growth, and the action of manufacturers, however SAH appears quite cheap at its current price mark. Today, we can buy shares at close to the valuation at which the company bought shares months ago. Sonic Automotive, Inc. Incorporated in Delaware in 1997, Sonic Automotive presents itself as one of the largest automotive retailers in the U.S. In the last annual report, the company noted 108 stores in the Franchised Dealerships Segment, 25 EchoPark stores, and 13 Powersports stores in the segment. The company operates with a significant number of luxury brands like BMW, Mercedes, Audi, Lexus, Porsche, and Cadillac, which may have more resale potential than other brands. In my view, the company mainly focuses on high-margin products. We continue to pursue opportunities to increase our sales of higher-margin products. Source: 10-k In the last quarterly report, the company reported lower than expected EPS GAAP figures. As a result, the stock price declined a bit in August, and September. Source: Seeking Alpha With that, the EPS numbers expected for 2026, 2027, and 2028 seem quite beneficial. With this in mind, I researched the company's long-term business potential. Source: Seeking Alpha Online Resale Could Accelerate Net Revenue, And Enhance FCF Margins The company appears to be investing in online platforms, which offer not only data mining techniques for clients, but also several tools to improve effectiveness of marketing and customer experience. It is also worth noting that the company can market products stored in Texas, California, or any other location to clients located anywhere in the United States thanks to the internet. In my view, these are revenue drivers, which will most likely continue to enhance the company's free cash flow growth and FCF margin in the coming years. Acquisition Of New Dealerships To Enhance Revenue Growth And Regional Expansion The company did acquire dealerships in the past, and will most likely continue to search for opportunities in new regions in the United States. In my view, the company's accumulated expertise of acquiring other companies may help in the coming years. However, it is worth noting that the retail automotive industry remains highly fragmented, which gives an open door for consolidation. Finally, considering the company's access to financing and the state of the balance sheet, I think that debt holders will accept new acquisitions. In this regard, I would invite investor to read the following lines from the last annual report. We believe that attractive acquisition opportunities continue to exist for dealership groups with the capital and experience to identify, acquire and integrate new dealership acquisitions. Source: 10-k Decline In The Number Of Late-model Used Vehicles In 2023 Could Be Quite Profitable For SAH In my view, the recent decline in the number of cars manufactured during COVID could be a beneficial driver for SAH. With an overall decline in the number of cars on the street, the company's car inventory could be worth a bit more. In addition, with the ongoing inflation, the price of new cars may also increase, and customers may decide to buy used cars instead. In my opinion, these drivers could lead to net sales growth and book value per share growth. In this regard, investors may want to have a look at the following lines from the most recent annual report. The supply of late-model used vehicles in 2023 continued to be affected by shortfalls in new vehicle manufacturing. According to industry sources, there were approximately 286.0 million light vehicles in operation in the U.S. as of December 31, 2023. During calendar year 2023, approximately 15.5 million new cars and 36.2 million used cars were sold at retail, many of which were accompanied by trade-ins that could then be resold as used vehicles. Source: 10-k Stock Repurchases Will Most Likely Enhance Future Price Performance The company appears to continue to repurchase its own shares. In 2024 H1, the company acquired 0.5 million shares for approximately $27.1 million. In my opinion, further acquisitions of stock will most likely drive demand up, which could have a beneficial effect on the stock price. Besides, from 2015 to 2024, the share count decline significantly.   Source: Seeking Alpha It is also worth considering that the current stock price is not far from the price mark at which SAH buys shares. In sum, if we buy today, we are buying with the company. In my view, companies know well how undervalued their stock is. SAH is buying at the current price mark because the company appears cheap. During the six months ended June 30, 2024, we repurchased approximately 0.5 million shares of our Class A Common Stock for approximately $27.1 million in open-market transactions at prevailing market prices and in connection with tax withholding on the vesting of equity compensation awards. As of June 30, 2024, our total remaining share repurchase authorization was approximately $259.6 million Source:10-k WACC Assumed In My Model Corporate documents offered by SAH included information about the interest rate paid by SAH. The weighted-average interest rate of the company's notes is close to 5%-6%. My discounted cash flow model included assumptions about the next five to six years, so interest rates may change quite a bit in that time period. Having said that, I assumed a WACC of about 6%, which I think is conservative. I do not think that analysts out there would really use a cost of capital very different from that of mine. As of December 31, 2023, the weighted-average interest rate of our other outstanding mortgage notes (excluding the 2019 Mortgage Facility) was 5.25% (an increase from 5.14% as of December 31, 2022) and the total outstanding mortgage principal balance of these notes (excluding the 2019 Mortgage Facility) was approximately $238.7 million. Source: 10-k My Price Target My financial model includes assumptions about future operations that include successful investment in online websites and development of technologies to enrich customer experience. I also assumed that management will be able to acquire beneficial dealerships as well as expand into new regions in the United States. Besides, I assumed that the decline in the number of late-model used vehicles in 2023 could be very beneficial for the company's inventory in the next six years. Finally, I assumed that the ongoing acquisition of shares could lower the cost of capital, and enhance the stock valuation. My valuation model includes very conservative FCF forecasting mainly based on previous free cash flow growth:   Source: Seeking Alpha I assumed a WACC of 6% and terminal EV/FCF of 9x, which implied total net present value of future free cash flow close to $2.8 billion, total enterprise value of $6.2 billion, and an equity valuation close to $2.5 billion. The implied valuation would be close to $75 per share. Given the current market price, I think that the company appears significantly undervalued.   Source: My Expectations  NPV of FCF @ WACC of 6%: $2,819.54 million NPV of TV @ xFCF of 9x : $3,477.79 million Total EV: $6,297.34 million Net Debt: $3722 million Equity: $2575 million Shares Outstanding: 34.1 million Target Price: $75  Other competitors are trading more expensively than Sonic. The company's PE FWD GAAP is close to 9x-10x. The sector median stands at close to 16x-17x FWD GAAP. Source: Seeking Alpha Risks From New Stores And The Action Of Manufacturers The company expects to find new locations for new stores. Such operations could bring significant operating risks like failed revenue growth, lower ROI than expected, insufficient capital to finance marketing campaigns, or capital expenditures. In addition, the company could also suffer from the action of certain manufacturers, which intend to offer an “agency” model of direct manufacturer to consumer sales in some European jurisdictions. Under such case scenario, the activity of dealers could deteriorate significantly as the number of potential customers could decrease. SAH offered the following explanation about these risks in the last annual report. Because these companies have the ability to connect with each individual consumer easily through their existing or future technology platforms, we may ultimately be at a competitive disadvantage in marketing, selling, financing and servicing vehicles. In addition, certain automobile manufacturers have expressed interest in or begun selling directly to customers. Source: 10-k Risks From The Total Amount Of Debt Given the total amount of debt and the fact that SAH signed debt agreements linked to the SOFR rate, changes in the interest rates could affect the company's total interest expenses. An increase in the interest rates may also affect the company's EV/EBITDA and EV/FCF valuation ratios. Under certain circumstances, certain shareholders may not appreciate the total amount of debt. They may sell shares, which could lead to a decrease in the demand for the stock and a decrease in the stock price. SAH may also not be able to finance future operations because debt holders may not offer debt financing at all. In such case scenario, SAH may not be able to finance its inventory or future opening of stores, which may lead to lower free cash flow growth. Our variable rate floor plan facilities, the 2021 Revolving Credit Facility, the 2019 Mortgage Facility and our other variable rate notes expose us to risks caused by fluctuations in the applicable interest rates. Source: 10-k Risks From Discontinuation Of Operations The company acquired a number of new stores in 2023, but also closed several EchoPark locations. Many things could go wrong about the company's acquisition activities. First, the valuation of acquisitions could fail. As a result, SAH could suffer goodwill impairments, and lower FCF growth expectations, which may drive the stock price down. In addition, SAH could close stores that may be offering net revenue growth, and may also lose key personnel with valuable know-how about the company's operations. Unfortunately, there is a lot of information that we cannot know about the reasons to discontinue certain operations or close certain stores. Conclusion  With many years operating in the industry, Sonic Automotive, Inc. appears to specialize in high-margin products, and appears to be making investments to enhance its online platforms and online customer experience. Besides, with access to financing, in my opinion, SAH is in a position to acquire new dealerships all over the country, which could enhance future FCF growth and net income growth. Finally, I think that lower supply of late-model used vehicles in 2023 could have a beneficial effect on the value of the company's car inventory. Putting everything together, in my view, the company appears undervalued considering previous free cash flow generation and my own conservative FCF forecasts. If the company continues to acquire its own shares, I think that we may see stock price increases in the coming quarters.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.26.4","shortVersion":"4.26.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2467789204"}