Restaurants Stocks

Sonic Corp Valuation – August 2018 $SONC

Company Profile (excerpt from Reuters): Sonic Corp., incorporated on August 31, 1990, operates and franchises the chain of drive-thru restaurants (Sonic Drive-Ins) in the United States. As of August 31, 2016, 3,557 Sonic Drive-Ins were in operation from coast to coast in 45 states, consisting of 345 Company drive-thrus and 3,212 franchise drive-thrus. As of August 31, 2016, the Company’s restaurant design and construction consisted of a kitchen housed in a one-story building, which was approximately 1,500 square feet, flanked by canopy-covered rows of 16 to 24 parking spaces, with each space having its own payment terminal, intercom speaker system and menu board. At a Sonic Drive-In, a customer drives into one of the parking spaces, orders through the intercom speaker system and has the food delivered by a carhop. Sonic Drive-Ins also include a drive-thru lane and patio seating to provide customers with alternative dining options.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of SONC – August 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $1,235,546,903 Fail
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.78 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 215.07% Pass
6. Moderate PEmg Ratio PEmg < 20 23.09 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 -4.67 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.78 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 15.38 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $1.48
MG Growth Estimate 15.00%
MG Value $57.03
Opinion Undervalued
MG Grade B-
MG Value based on 3% Growth $21.48
MG Value based on 0% Growth $12.59
Market Implied Growth Rate 7.30%
Current Price $34.21
% of Intrinsic Value 59.98%

Sonic Corporation is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, low current ratio, poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $0.64 in 2014 to an estimated $1.48 for 2018. This level of demonstrated earnings growth outpaces the market’s implied estimate of 7.3% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Sonic Corporation revealed the company was trading above its Graham Number of $0. The company pays a dividend of $0.56 per share, for a yield of 1.6% Its PEmg (price over earnings per share – ModernGraham) was 23.09, which was below the industry average of 29.02, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-19.15.

Sonic Corporation performs fairly well in the ModernGraham grading system, scoring a B-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$19.15
Graham Number $0.00
PEmg 23.09
Current Ratio 1.78
PB Ratio -4.67
Current Dividend $0.56
Dividend Yield 1.64%
Number of Consecutive Years of Dividend Growth 3

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Most Recent Balance Sheet Figures

Balance Sheet Information 5/1/2018
Total Current Assets $104,135,000
Total Current Liabilities $58,512,000
Long-Term Debt $701,853,000
Total Assets $545,546,000
Intangible Assets $75,344,000
Total Liabilities $818,806,000
Shares Outstanding (Diluted Average) 37,316,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.86
Aug2017 $1.45
Aug2016 $1.29
Aug2015 $1.20
Aug2014 $0.85
Aug2013 $0.64
Aug2012 $0.60
Aug2011 $0.31
Aug2010 $0.34
Aug2009 $0.81
Aug2008 $0.97
Aug2007 $0.91
Aug2006 $0.88
Aug2005 $0.75
Aug2004 $0.63
Aug2003 $0.52
Aug2002 $0.50
Aug2001 $0.41
Aug2000 $0.35
Aug1999 $0.28
Aug1998 $0.20

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.48
Aug2017 $1.22
Aug2016 $1.05
Aug2015 $0.86
Aug2014 $0.64
Aug2013 $0.53
Aug2012 $0.52
Aug2011 $0.55
Aug2010 $0.70
Aug2009 $0.88
Aug2008 $0.88
Aug2007 $0.81
Aug2006 $0.72
Aug2005 $0.62
Aug2004 $0.53
Aug2003 $0.45
Aug2002 $0.40

Recommended Reading:

Other ModernGraham posts about the company

14 Best Stocks for Value Investors This Week – 2/11/17
Sonic Corporation Valuation – Initial Coverage $SONC

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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