Despite Choppy Sales, Sonic's Q3 Proves Fundamentals Are Getting Better

Revenues fell to $123.99 million from the year-ago's $165.24 million, with revenues from company drive-ins suffering notably.

System same-store sales fell 1.2 percent.

The company said it continues to expect a 2–5-percent year-over-year drop in adjusted earnings per share for fiscal year 2017. The comp estimate for the year was a negative 2.5 percent.

Improving Fundamentals

Commenting on the results, Oppenheimer said fundamentals of the company are getting better. The firm said the third-quarter results were relatively in-line without major surprises.

Analysts Brian Bittner and Michael Tamas noted management commentary on same-store sales trends saying they were soft to end the third quarter and through to the beginning of the fourth quarter. Nevertheless, the analysts expect re-acceleration in same-store sales, helped by the company's promotional calendar and lapping last year's traffic drop-off.

Delving on the other metrics, Oppenheimer said restaurant margins were 18.4 percent, up 40 basis points year over year and comparing favorably to the Street estimate of 17.9 percent. The firm noted that labor costs remained a headwind, offset by favorability on COGS and other operating expenses.

Oppenheimer expects the company's balance sheet to take more leverage after the August board meeting.

The firm maintains its 2017 earnings per share estimate unchanged at $1.25 but tweaked its 2018 earnings per share estimate lower, premised on slightly more G&A expenses than it had modeled initially.

Shares Expected To Be Range Bound

As such, Oppenheimer maintains its Outperform rating on the shares of Sonic, with a 12–18-month price target of $29.

The firm thinks the shares would be range bound until the lackluster same store trends improve. That said, the firm feels downside would be limited by EBITDA multiple and FCF yield.

"Despite the choppy sales environment, EPS now has lower volatility owing to its ~94 percent franchised model and the opportunity for an accretive balance sheet catalyst is intriguing," the firm said.

"As fundamentals improve, the stock's EBITDA multiple (10.8x) should regain health vs. peers (at 14x+) and highlights the interesting longer-term risk/reward at current levels."

At time of publication, shares of Sonic were up 3.02 percent at $28.33.