Reporter's Notebook
Why did investors hammer Sonic's stock?

Why did investors hammer Sonic's stock?

Jonathan Maze

Sonic Corp. this week reported the type of quarter that restaurant executives dream of. The company’s same-store sales rose by 11.5 percent in the quarter ending Feb. 28, the best quarterly performance in the company’s history. Net earnings per share doubled and beat expectations. And the company raised profit projections for the year.

Naturally, the stock fell more than 12 percent.

Exactly why Sonic would fall that much after that kind of quarter is something of a mystery. But it could be a demonstration that investors are finally realizing that restaurant stocks are overvalued.

Indeed, restaurant stocks overall were weak today. The NRN Restaurant Index fell nearly 2 percent today, and the vast majority of restaurant stocks declined in value. The S&P 500 Index, meanwhile, fell 1.5 percent. The Dow Jones Industrial Index fell 1.6 percent and is now down for the year.

Restaurant stocks have had a much better year than the broader market. They’re up more than 8 percent for the year, according to the NRN Index. Nearly all restaurant companies are trading at enterprise value multiples of more than 10 times cash flow.

Those types of valuations put super high expectations on the restaurant companies and give investors itchy trigger fingers. So the industry has seen a number of companies get hammered by Wall Street after reporting strong earnings and sales numbers.

Sonic has been among the strongest performers of restaurants on Wall Street this year. Going into today, the company’s stock was up 35 percent and it had an earnings value multiple of more than 16 times forward cash flow.

Sonic’s performance this year has drawn plaudits from analysts and observers. It has even led to favorable comparisons to Shake Shack.

Ironically, Sonic might have paid the price today for its performance so far this year. Sterne Agee Analyst Lynne Collier noted in a note today that the volatility in the stock might be due to investors’ fear that “the best is behind” the company.

In addition, Collier said, some investors might have taken profit following the chain’s stock price increase this year, and others might have been disappointed the company won’t refranchise.

Collier, for what it’s worth, believes the company’s sales momentum will continue thanks to technology and a strong product pipeline, and says the company’s second half guidance was conservative. She has a Buy rating on the stock.

TAGS: Sales Trends
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