Why UBS Is Upgrading Sonic

• Sonic Corporation SONC shares are down 15 percent over the past six months, remaining below the $36 mark since March 24.
• UBS analyst Keith Siegner upgraded the company from Sell to Neutral, while maintaining the price target at $30.
• Although the stock valuation is the cheapest among domestic QSRs, risk/reward appears balanced against potential SSS challenges ahead, Siegner said.

Analyst Keith Siegner mentioned that Sonic’s stock valuation is now one of the lowest among domestic QSRs. There is limited downside risk in view of the company’s attractive FCF yield of around 6 percent and robust comps momentum from “internal growth initiatives and favorable macro tailwinds.”

Siegner added, however, that he company’s risk/reward appears “balanced” given the potential for same-store sales challenges ahead and aggressive unit growth expectations.

The company’s 2016 estimates are not aggressive and there is potential for upside, the UBS report mentioned. The EPS estimate for F16 has been raised from $1.19 to $1.22 to reflect higher company restaurant margins and increased share repurchase.

Siegner expressed concern regarding the emergence of an “increasingly competitive” McDonald's Corporation MCD, with “a strengthened position behind a national value push, new products/LTOs, launch of a digital app, and the upcoming rollout of all-day breakfast.”

This is expected to restrict the market share and comps of various companies in the burger segment including Sonic, the report mentioned. Siegner added, “Further, w/ limited visibility into unit growth expectations, analysis of franchisee unit returns highlights risks to unit growth targets.”