EV Surge Will Erode Franchise Networks Despite Some Gains

Key Takeaways

• Shifting to direct sales and online platforms threatens Sonic's traditional dealership model, eroding market share and pressuring revenue and store economics.
  
• Rising costs, industry consolidation, and changing vehicle demand increase margin volatility and put long-term earnings growth at risk.
  
• Expansion of EchoPark, strong service revenue streams, disciplined growth, operational efficiency, and high customer satisfaction position the company for sustained earnings growth and resilience.

Catalysts

Operates as an automotive retailer in the United States.

• The rapid acceleration of the electric vehicle market and stricter government mandates are likely to further disrupt traditional dealership business models, eroding Sonic Automotive's long-term revenue base as more OEMs shift to direct-to-consumer sales and reduce inventory allocations to franchise dealers.
  
• The growth of online-only and direct-to-consumer platforms is diminishing the relevance of physical dealerships, threatening Sonic's core franchised dealership model and putting sustained pressure on both top-line revenue and the company's long-term ability to defend its existing store economics and market share.
  
• Ongoing industry consolidation elevates competitive pressure from larger, better-capitalized peers who are aggressively expanding digital capabilities, while Sonic's acknowledged slower pace of digital investment leaves it at risk of continued margin and earnings compression as customer buying preferences shift online.
  
• Persistent headwinds in vehicle affordability, exacerbated by tariff-related price shocks and broader urbanization trends, are expected to shrink the addressable market for personal vehicles and used cars, driving lower sales volumes and pressuring both gross profits and earnings growth over the long term.
  
• The risk of thinner net margins is likely to be magnified by escalating labor costs, ongoing compliance and technology upgrade expenses, and the cyclicality of new vehicle inventory turns, resulting in increased earnings volatility and reduced resiliency of Sonic Automotive's cash flows in the years ahead.

Sonic Automotive Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Sonic Automotive compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Sonic Automotive's revenue will grow by 4.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 1.7% today to 1.6% in 3 years time.
• The bearish analysts expect earnings to reach $268.7 million (and earnings per share of $8.33) by about July 2028, up from $244.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.2x on those 2028 earnings, down from 11.1x today. This future PE is lower than the current PE for the US Specialty Retail industry at 17.6x.
• Analysts expect the number of shares outstanding to decline by 0.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.54%, as per the Simply Wall St company report.

Sonic Automotive Future Earnings Per Share Growth

Risks

• The ongoing expansion and operational improvements in EchoPark, including higher profits, record gross profit per unit, and a successful shift to more off-street vehicle sourcing, demonstrate robust growth potential and ability to capture share in the used car market, suggesting EchoPark could increasingly drive overall revenue and earnings growth.
  
• Investments in hiring and productivity of service technicians, combined with strong growth in fixed operations gross profit and an ability to pass along costs (such as tariffs) to consumers, indicate recurring, high-margin parts and service revenue streams may provide earnings resilience and long-term margin support.
  
• The company's demonstrated ability to quickly and efficiently open new stores-backed by a prepared real estate pipeline and lessons learned from past market disruptions-creates opportunities for accelerated footprint expansion, which could lead to higher consolidated revenues and improved cost leverage.
  
• Record levels of liquidity and disciplined capital deployment give Sonic Automotive both stability and the flexibility to capitalize on strategic growth opportunities (including M&A), supporting future revenue growth and the ability to weather short-term shocks.
  
• Management's focus on technology-driven operational efficiency, data-driven inventory management, and elevated guest experience (notably at EchoPark, which achieves industry-leading customer satisfaction and repeat business) is likely to drive higher productivity and net margin performance over the long term.

Valuation

• The assumed bearish price target for Sonic Automotive is $60.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Sonic Automotive's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $92.0, and the most bearish reporting a price target of just $60.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $16.6 billion, earnings will come to $268.7 million, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 11.5%.
• Given the current share price of $79.95, the bearish analyst price target of $60.0 is 33.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.