Company Spotlight - Sonic Corp.

Cheeseburger, Cheeseburger, Cheeseburger

Nasdaq: SONC
$23.40 (as of 12/13/07 )
P/E 27	PSR 1.9
ROE 45%	BETA 0.99
Debt/Eq. 1.0
Our "Five Benchmarks" tutorial explains these numbers

• The Good: Opening new drive-ins, retrofitting old ones.
• The Bad: Highly leveraged.
• The Beatiful: Return on Equity extraordinary.

December 13, 2007 - Sonic Corp. (SONC-NASDAQ) operates the largest chain of quick-service drive-ins in the US, with more than 3,300 locations in Texas and about 35 other mostly Southern states. The eateries offer a menu of hamburgers, chili cheese hot dogs (Coneys), onion rings, and tater tots, along with breakfast burritos, wrap sandwiches, and frozen desserts. Most locations offer drive-thru service and a few have indoor seating. The company operates and has a majority interest in about 650 of the restaurants, while the rest are franchised.

This stock has been somewhat range bound over the last 3 years, moving between $18 and $26 (prices adjusted for a 3 for 2 split in 2006) while earnings have continued to improve.  In 2004 they were 68 cents a share, then went to 81 cents, followed by 88 cents and $1.01.  For 2008 (fiscal year ends in Aug), analysts are looking for $1.15.  Not spectacular but good.  Some of the earnings improvement has come from a share buyback program.

The company is looking to grow.  In 2007, it opened 175 new restaurants, a little below its target of 180.  In 2008, its goal is to have 180 to 200 new drive-ins and retrofit 600 to 700 of the partner and franchise ones.  The face-lift should enhance the value of the brand and increase business.

Sales are climbing at a steady pace, going from $536 million in 2004 to $770.5 million in 2007.  Analysts are expecting $835 million next year.  Over the following 5 years, projections are for 10% annual growth on average in revenues while earnings are expected to increase by 17% a year.  That's in contrast to the last 5 years when sales were up 17.5% a year, on average, and earnings grew by 18%.  The profitability margin is expected to be about the same even from slower sales as the company is cutting costs as quickly as possible.

There are some concerns with this stock.  First, debt is 100% of capital, making for a very leveraged balance sheet.  Second, the valuation is relatively high for a restaurant company with a P/E of 27.  A more normal level for this stock has been between 18 and 23.

Some more numbers.  Foremost is the Return on Equity at 45%.  It's hard to find a stock that returns that much to owners.  Of course, the leverage factor is what gives such a strong return.  There is no dividend.  Officers and directors own a little over 8% of the stock.  The market cap is $1.4 billion on 60.8 million shares.

Sonic is booming with new restaurants opening every other day.  Cost cutting is one of the focuses of management.  Buybacks are continuing.  Earnings are moving ahead but not as securely as most investors like.  It would be better to see higher earnings with no buybacks.  Interest payments are somewhat heavy, and debt is significant.  Still management has moved the company forward and used capital well.  Investors noticed.  The stock is trading at a relatively high valuation.  This is a good story but if it has your interest, delve more into the details before committing to it.

- Company Web site: www.sonicdrivein.com

- Ted Allrich

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