This Analyst Cuts Sonic Automotive's Earnings Estimates & Price Target Citing Lower Industry Volume Assumptions

  • Benchmark analyst Michael Ward reiterated a Buy rating on the shares of Sonic Automotive Inc SAH and lowered the price target from $71 to $62.
  • The analyst said dealers are likely to carry 30% less inventory going forward than in the past, shifting from a discount model to a prestige relationship with consumers, resulting in higher levels of variable gross margin.
  • In the meantime, Ward said Sonic and the rest of the group should continue to generate record levels of operating cash, enabling growth investment and returns to shareholders.
  • He expects the company to generate $1.2 billion in combined operating cash flow in 2022 and 2023, or about 70% of the current market cap, enabling elevated returns to shareholders and growth investment.
  • Sonic Automotive reported Q3 earnings per share of $2.23 versus $1.95 a year ago, missing the Street view of $2.47.
  • He cited that the U.S. light vehicle sales have been below trend since the COVID-19 shutdown and more recently sales have been restricted by component shortages that have limited production.
  • Tight supply has limited sales expansion and has largely eliminated the historical seasonality of demand.
  • Strong underlying demand, ongoing supply shortages and capacity constraints will limit inventory addition to about 100,000 units a month, extending the replenishment cycle into late-2023 or early-2024, Ward noted.
  • He lowered the FY22 earnings assumption to $9.10 per share, down from $9.65 per share, to reflect lower third-quarter performance and reduced volume assumptions.
  • Price Action: SAH shares are trading lower by 0.49% at $47.02 on the last check Monday.
  • Photo Via Company
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