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

Jacob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In a surprising move, Sonic Automotive (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% after the announcement.

The next day following the announcement, the stock was down as much as 2.5%. 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 recently. This temporary weakness appears to be a blessing in disguise as major auto dealers have been benefiting from robust auto sales.

The glass is (more than) half full

Sonic itself has advanced double digits since the start of the year but still trades at a forward PE 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.

The competition

Sonic Automotive is part of the largest auto retail network in the U.S., which also includes Penske Automotive (NYSE: PAG) and AutoNation (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 Automotive 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 recent market price of $32.8.

Car sales set to surge

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 CEO Mike Jackson noted while presenting latest results, the retail recovery is still in the "early innings," and 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 the forefront when the company reports its first quarter results.

Foolish bottom line

Overall, the car retailers have enjoyed a dream run on the market in recent months, and 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.


Jacob Wolinsky has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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