Longbow Research Is Buying Into Sonic On 'Unique' Model

• Sonic Corporation SONC shares are down 7 percent year-to-date, and have remained below the $35 mark since April.
• Longbow Research’s Alton Stump upgraded the rating on the company to Buy, with a price target of $34.
• Mentioning that the company has a differentiated model, Stump expressed confidence in its ability to generate mid to high teen earnings growth.

Expressing optimism regarding Sonic’s short-term and long-term growth prospects, analyst Alton Stump said, “Sonic possesses a unique drive-in model that differentiates the company among its largely homogenous domestic restaurant peers.”

Stump enumerated the following changes taking place at the company:

1. The company’s franchised network is expected to generate incremental same-store sales from the new digital Point of Personalized Service [POPS] during FY16-Fy17. This could be partly driven by the pending integration of mobile technology with the new menu boards.
2. The recent comp outperformance by franchised Sonic restaurants versus company-owned locations does not appear to be a major concern. Company-owned stores have higher exposure to more saturated markets and “are also located more prevalently in oil field regions.”
3. Sonic is likely to achieve mid to high teen+ earnings growth every year for several years, positioning the company in “the upper tier among its major restaurant peers.”
4. Compared to most of the company’s peers with similar heavily-franchised systems, Sonic’s shares are currently trading at a 20-30 percent discount on a forward EV/EBITDA basis.

“As a concept with substantial exposure to mid- to low-end income consumers, Sonic is well positioned to continue to benefit from an improved domestic consumer spending power environment,” Stump wrote.