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Fast-food chain Sonic (NASDAQ: SONC) is known for its funny commercials and unique menu offerings. But investors may also want to associate this company with rapid growth, because that’s the key takeaway from the latest Sonic earnings report on Tuesday.
Sonic’s stellar fiscal first-quarter earnings release sent the stock up 3% in after-hours trading before giving up those gains and turning slightly lower. Still, Sonic shares have outperformed the broader market. The stock rose 15% in 2015, not including dividends, while the S&P 500 index was down 1% for the year.
Here’s the secret sauce that allows Sonic to grow at a breakneck pace, while its rivals in the fast-food space struggle to grow at all.
Sonic’s Differentiated Model
Sonic is the nation’s largest drive-in restaurant chain and is an innovator within its industry, with signature products like Master Blast Real Ice Cream treats that break the mold of the traditional burger-and-fries offerings.
Sonic’s product offerings break the traditional burgers-and-fries model that most fast food chains subscribe to. More recently, Sonic has added to its unique menu, with newer offerings like premium chicken sandwiches proving to be a hit with customers.
This unique experience has received a great response from customers, and Sonic is responding by opening new restaurants. In the first quarter, Sonic opened 13 new drive-ins, and the company expects to open 50 to 60 new franchised restaurants in fiscal 2016.
It’s this differentiated customer experience that sets Sonic apart from its rivals, which is especially impressive given the extremely saturated fast-food industry in the United States. Sonic is generating growth that should make it the envy of its fast-food peers.
Sonic Earnings Report Shines
For the quarter, Sonic earned $0.24 per share of profit on $145.8 million of revenue. Earnings exactly met analyst expectations, while revenue came in slightly higher than the $145 million expected.
On a year-over-year basis, Sonic’s earnings soared 33% from the same period last year. The main reason for its strong growth was another impressive quarter for customer traffic. Comparable sales, a critical measure of sales growth at locations open at least one year, rose 5.3% last quarter.
Another major driver of Sonic’s earnings growth is its aggressive stock buyback program. Sonic is in the enviable position of being a high cash-flow generator. Sonic returns a great deal of its cash flow to shareholders through a 1% dividend, but primarily through share repurchases.
Last quarter alone, Sonic repurchased 3.4% of its outstanding shares.
Why Sonic Could Reward Investors Again in 2016
Sonic outperformed the market last year, and if its sales and earnings grow on schedule, the stock could reward investors again this year.
Going forward, Sonic management expects full-year comparable sales to grow in the 3% to 4% range. In addition to new restaurant openings and an expected 75 to 125 basis-point improvement in profit margin, Sonic expects 16% to 20% earnings growth for the full year.
Sonic pays a 1.4% dividend, which is a nice kicker to the stock’s total return potential. Plus, Sonic is a strong pick for dividend growth. The company’s earnings are rising, and it distributes just 36% of its earnings as a dividend. There should be more than enough earnings to simultaneously buy back stock aggressively, and grow its dividend over time. Last year, Sonic raised its dividend by 22%.
Sonic stock is not the cheapest around, trading at 26 times earnings. That is a higher level than the S&P 500, which trades closer to 20 times earnings. But Sonic has proven to generate enough growth to justify its valuation. As the saying goes, premium stocks command premium valuations.
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