Morningstar | Sonic Holds the Course in Its 3Q Results
Sonic Automotive's third-quarter numbers gave us no reason to change our long-term outlook for the company, so we are leaving our fair value estimate unchanged. Adjusted diluted EPS of $0.43 matched consensus and grew 7.5% year over year. Revenue declined 1.4% to $2.47 billion to slightly miss consensus due to declines in new vehicles and service of 9.3% and 1.3% respectively. Neither category's weakness concerns us though. New vehicle unit volume fell 12.6% while new vehicle gross profit per unit grew 6.5% to $1,988. This suggests to us that management refused to chase volume at the expense of profit. Management on the call also pointed out it stopped having to overly discount the Honda Accord and gave a lot of attention to pricing profitably at its Honda and BMW stores. Newly promoted president Jeff Dyke said as Honda and BMW go, so goes Sonic Automotive. We don't disagree because in 2017 these two brands constituted 37% of new vehicle revenue from continuing operations.The decline in parts and service does not bother us because the decline is attributable mostly to the warranty side of the business. The customer pay component, which is the largest single piece of service revenue, grew 1.3% and same-store customer pay revenue grew 4.9%. These facts suggest to us that the segment is in good shape because customers are choosing to bring their vehicle to a Sonic service bay even when their vehicle is off-warranty, a reason we award dealers a narrow economic moat.
Management confirmed its already issued guidance of full-year adjusted EPS of $1.90-$2.00, including losses from the standalone used store business, EchoPark. U.S. auto sales tend to be strong in December for end-of-year sales and Sonic's earnings are often heavily skewed to the fourth quarter, mostly due to over half its business from premium brands which are very competitive with each other at year-end. 2018 looks no different with nearly half of adjusted EPS likely to occur in the fourth quarter.
Sonic Automotive is an automotive retailer in the United States. The company has two reportable segments: the Franchised Dealerships Segment and the EchoPark Segment. The Franchised Dealerships segment is comprised of retail automotive franchises that sell new vehicles and buy and sell used vehicles, sell replacement parts, perform vehicle maintenance, warranty and repair services, and arrange finance and insurance products. The EchoPark segment is comprised of pre-owned vehicle retail locations that provide customers an opportunity to search the company's nationwide inventory, purchase a pre-owned vehicle, select finance and insurance products and sell their vehicle to the company
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