A couple of years back, my brother-in-law and his family and my family were on a road trip in South Carolina. As we were barreling down the highway, we passed a fast food joint called Sonic (Nasdaq: SONC), which is a quick-service drive-in burger chain. I had never been there, but my brother-in-law had, and he said it was pretty good.
Love Those Burgers
Now, at first I hesitated because I am a bit of a health nut, and I don't frequent fast food joints all that often. But when I do, I go crazy, eating everything I can fit on my tray. In any case, we were in a hurry, and Sonic was right there, so we gave it a shot.
It was great - I mean really great - and different than most burger joints. It wasn't overly greasy, and it was super clean. Overall, it was a great experience.
Why Ramble On About A Burger Joint?
• About a week ago, Friedman Billings upped its rating on the stock from 'market-perform' to 'outperform'.
• There are ongoing rumors that private equity firms are kicking the tires at big name fast-food chains.
These opportune events play hand-in-hand with the stock's other strengths as well.
First off, the company is coming off a pretty decent second quarter. In fact, for the period ended February 28, the company earned (excluding special charges) 16 cents per share - which was about two cents ahead of Wall Street estimates.
On the revenue line, Sonic was impressive as well, generating $161.5 million in sales which was about a half million north of expectations. Also, its same store sales grew at about a 2% clip for the quarter, which is also pretty decent in this environment.
Looking ahead, the company is expected to continue to grow on a same-store basis. It should also grow on an absolute basis as well, as it plans to open between 180 and 190 locations this year. The current store base is about 3,200.
I would also suggest that from a future earnings perspective, the company looks pretty attractive. As of right now, Wall Street expects that Sonic will earn 97 cents per share in fiscal 2007, and $1.14 next year.
That implies a roughly 18% expected rate of growth. And over the next five years, Wall Street forecasts annual growth of about 17.2% per year. This is noteworthy because, according to data provided by Yahoo! Finance, the industry is expected to grow at just 13.84% over that same period of time.
Another potential catalyst for the stock could come from the growing interest that private equity firms seem to have in the group. Why are private equity groups attracted to fast food chains right now?
Fast food chains tend to fare well in varying economic conditions, and because of the pent-up value that many of these companies have in real estate holdings.
With that in mind, according to the company's latest 10-Q it has about $486.5 million in property, equipment and capital leases net of depreciation on its books. That's only about $6.95 per share - which makes it somewhat less appealing as a takeout candidate than company such as McDonald's (NYSE: MCD), with its vast real estate holdings and looming worldwide presence. (To learn more about the subject, see The Wacky World Of M&As.)
That said, with big names such as Wendy's (NYSE: WEN) supposedly mulling the strategic options and alternatives, I would argue that there's bound to be some speculation of additional acquisition activity going forward. This could help propel the stock higher as well.
The Bottom Line
Sonic has good food. Its same-store sales are currently trending in the right direction. Plus it's expected to grow its bottom line at a fairly healthy clip over the next few years. In short, these features, coupled with the excitement created by private equity firms, make me believe that the stock has even greater upside potential.
In terms of price targets, I think that if the company can meet the above mentioned consensus numbers for '07 and '08, the stock could trade to the $30 range.
Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!