Don’t Be Fooled by Sonic Automotive’s Delayed Filing

Don’t Be Fooled by Sonic Automotive’s Delayed Filing

In a surprising move, Sonic Automotive Inc (NYSE:SAH) filed an application with the Securities and Exchange Commission seeking more time for filing its annual report. Usually, companies follow this route in the event of material impact of an acquisition or other similar development on the finances. It was thus natural for the market to get unnerved by the notice of late filing and the stock lost as much as 8% in intraday trade yesterday.

Today, the stock is down nearly 3% to $22.9. However, the third largest auto dealer network in the US said the delayed filing is because of weak accounting controls at its dealerships. The company also stated it does not expect its financial results to be different from what it announced last month. This temporary weakness appears to be a blessing in disguise as major auto dealers have been benefitting from robust auto sales. Sonic itself has advanced nearly 13% since the starting of the year but still trades at a forward price earnings multiple of just over 10. The market is obviously considering it a negative but Bank of America’s observation that the recent developments are “not as negative as initially perceived by the market” puts things into perspective.

Don’t Be Fooled by Sonic Automotive’s Delayed Filing

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SSonic Automotive Inc (NYSE:SAH) is part of the largest auto retail network in the U.S., which also includes Penske Automotive Group, Inc. (NYSE:PAG) and AutoNation, Inc. (NYSE:AN). As such, Sonic’s fortunes are in close relation to these companies. Penske Automotive is the second largest auto retailer in the country but for all practical purposes, it can be considered a specialized player given its very high focus on luxury brands. Last year, the network saw nearly 49% of its revenues coming from just Mercedes, BMW and Audi. That is without considering other brands such as Porsche, Acura and Jaguar. As a result, Penske enjoys rich valuations. This was once again highlighted after the company reported a 19.5% jump in adjusted profits for the latest quarter while revenues grew 18%. In light of the strong results, KeyBanc has upgraded the stock to $36 compared to the market price of $32.8.

AutoNation – the largest US dealer network – is a diversified player but has a strong presence in the luxury vehicle market. Nearly 29% of its revenues were due to luxury vehicle sales in 2012. As AutoNation, Inc. (NYSE:AN) CEO Mike Jackson said while presenting latest results, the retail recovery is still in ‘early innings’, auto sales can be expected to go up further. This is made possible by improved financing, new products and genuine replacement need and is more true for premium brands than the mass-market ones. AutoNation has been very aggressive with its expansion and branding plans and has even approached car companies to carve out a separate brand for its stores. The company acquired six more stores towards the end of last year, which still does not reflect in its valuations. These actions, aimed at boosting profits, are expected to come at forefront when the company reports its first quarter results.

Overall, the car retailers have enjoyed a dream run on the bourses in recent months but there appears to be more steam left in the rally. The three players have all gained in double digits over the last quarter. While this has kept the valuations in line with the larger market, these stocks do not appear to be over-valued on key metrics. In fact, the upbeat sales outlook of a 7% improvement in industry sales during the current year, shared by all the players, does not reflect in valuations and this will be considered in future pricing.

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