Summary
- I recommended Sonic Automotive about two months ago, and during that time it has delivered 27% return not counting the dividend.
- The company is experiencing a strong organic growth fueled by the Echo Park expansion.
- The company just reported blow-out earnings that drove the stock to new highs.
- The question now is do I get out or is it time to double down on my bullish call.
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When I first recommended Sonic Automotive (SAH) on Seeking Alpha my bullish thesis was based on three things; dividend outlook, the technical outlook, and the fundamental drivers. At the time the article was published Sonic was trading near $22, my target was a range between $28 and $30 for a gain near 30%, and that target was hit today.
Blow-out earnings sent the stock shooting up to test its long-term high and it looks like resistance will cap gains in the near term at least. The question now is this, is Sonic Automotive still a buy or is it time to take profits.
Source: Sonic Q2 earnings presentation
The Fundamental Picture - Sonic Blows Past Consensus
Sonic reported revenue of $2.61 billion. This is up more than 4.0% from last year, most of the gain was unexpected by the analysts. EPS came in at $0.62 GAAP and non-GAAP to clear consensus by nearly 32%. Strength was firmly centered in the Echo Park expansion which should drive revenue strength in coming quarters. Echo Park is Sonic's answer to the certified pre-owned car market and is performing well above initial expectations.
from the 2Q earnings report...
We believe we will be able to open an additional EchoPark store before the end of 2019 and another shortly thereafter in the first half of 2020. Our current plans include two additional EchoPark store openings in the second half of 2020.
The Echo Park unit sales data really tells the tale though. The number of units has been steadily rising along with the opening and development of each new market. June sales are of particular note, surging 13% above expectations to hit a new high. With four new centers expected over the next twelve months, the pace of unit volume growth should be easily sustained.
