On Friday, Sonic Auto (NYSE: SAH) received an updated stock price target from Needham, reflecting confidence in the company's recent performance and future prospects. The price target was raised to $74 from the previous $73, while the firm maintained a Buy rating on the stock.
The upgrade comes after Sonic Auto's third-quarter results, which showcased the strength of its EchoPark used vehicle segment. The segment reported unit growth, even when compared to a strong previous year, and demonstrated improved profitability. This growth is attributed to customer appreciation for Sonic Auto's competitive pricing and straightforward sales approach.
Sonic Auto's franchise business presented a more varied performance. The initial fiscal year 2025 retail gross profit per unit (GPU) guidance showed potential challenges, yet there are optimistic signs as well. The company's service business, which boasts a higher gross margin, is expected to benefit from an expanding technician base and ongoing original equipment manufacturer (OEM) warranty work.
The analyst's optimism is primarily underpinned by the EchoPark segment, while a more cautious stance is taken towards the franchise side of the business. The new price target of $74 is based on a projected enterprise value of $6.5 billion, with $5.5 billion attributed to Sonic Auto's franchise dealerships and $1 billion to the EchoPark segment.
This valuation stands in contrast to the current enterprise value derived from Sonic Auto's equity price, which is set at $5.5 billion.
InvestingPro Insights
To complement Needham's optimistic outlook on Sonic Automotive (NYSE: NYSE:SAH), recent data from InvestingPro provides additional context for investors. The company's P/E ratio of 9.85 suggests that the stock may be undervalued relative to its earnings, aligning with Needham's bullish stance. This is further supported by InvestingPro's fair value estimate of $79.84, which is higher than both the current stock price and Needham's new target.
InvestingPro Tips highlight that Sonic Automotive has maintained dividend payments for 15 consecutive years and has raised its dividend for 4 consecutive years. This consistent dividend policy, coupled with a current dividend yield of 2.09%, may appeal to income-focused investors. The company's profitability over the last twelve months and analysts' predictions of continued profitability this year reinforce the positive outlook presented in the article.
It is worth noting that InvestingPro offers 8 additional tips for Sonic Automotive, providing investors with a more comprehensive analysis of the company's financial health and market position.
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