On Tuesday, JPMorgan (NYSE:JPM) upgraded Sonic Automotive Inc . (NYSE: NYSE:SAH) stock rating from Neutral to Overweight. The firm also increased the price target for Sonic Auto shares to $63.00 from the previous target of $58.00.
The upgrade comes as Sonic Automotive, which operates both franchise and EchoPark stores, has shown solid execution in its operations. A particular point of strength noted by the analyst was the company's cost management, with franchise selling, general, and administrative expenses (SG&A) coming in below the full-year guidance of the low 70s.
EchoPark, Sonic's chain of used car dealerships, has been handling a challenging supply environment effectively, maintaining resilient gross profit per unit (GPUs) that exceed long-term targets and keeping a tight rein on SG&A expenses.
JPMorgan's recent assessment highlighted Sonic Automotive's ability to separate same-store unit growth trends from the broader used car market. The company's second quarter results and second half commentary suggest that this trend is likely to continue, coupled with better than expected unit economics.
Despite the positive performance, Sonic Auto's shares have lagged behind its peer group by approximately 300 basis points, showing flat relative performance year-to-date.
However, JPMorgan finds the valuation appealing, noting that the stock is trading at around a 15% discount on earnings before interest, taxes, depreciation, and amortization (EBITDA) and free cash flow (FCF) based on revised and higher estimates. This assessment positions Sonic Automotive's stock as offering an attractive risk-reward profile in JPMorgan's coverage.
In other recent news, CDK Global (NASDAQ:CDK) Inc. has been the target of a cyberattack, leading to disruptions in operations for auto dealerships across the United States.
The hacker group, purportedly from Eastern Europe, has demanded a multimillion-dollar ransom, the exact amount of which remains undisclosed. These developments have caused a series of system outages at CDK, a technology and software solutions provider to car retailers.
Auto retailers Sonic Automotive Inc. and Penske Automotive Group (NYSE:PAG) Inc. reported operational challenges due to the CDK system outage. Ford Motor Company (NYSE:F) also acknowledged an industry-wide system outage affecting dealers using CDK's services. Despite the challenges, Ford, Sonic, and Penske continue to provide service and sales support through alternative processes.
The scale of the cyberattack's impact could be substantial, as CDK Global serves over 15,000 retail locations across North America. The company has yet to issue a response regarding the hack or the ransom demand. These are the recent developments that have unfolded in the wake of the cyberattack on CDK Global Inc.
InvestingPro Insights
Following the upgrade from JPMorgan, Sonic Automotive Inc. (NYSE: SAH) exhibits compelling metrics that align with the positive sentiment. The company's management has been actively repurchasing shares, which is often a sign of confidence in the firm's future prospects. Additionally, Sonic Automotive has consistently raised its dividend for the past three years, showcasing a commitment to returning value to shareholders.
In terms of financial health, the company's adjusted market capitalization stands at $1.96 billion, with a P/E ratio of 11.46 and an even more attractive adjusted P/E ratio for the last twelve months as of Q1 2024 at 8.2. This valuation metric suggests the stock could be undervalued, particularly when considering the company's solid revenue of $14.27 billion over the same period. Despite a slight contraction in quarterly revenue growth, the company's gross profit margins, while noted as weak, still stand at 15.62%, indicating a stable ability to generate earnings above its direct costs.
Investors should note that while analysts have revised their earnings expectations downwards for the upcoming period, the company has been profitable over the last twelve months and is expected to remain profitable this year. Sonic Automotive's stock price movements have been quite volatile, which could present opportunities for investors with a higher risk tolerance.
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