Sonic Corporation: 10% Sell-Off After Earnings Is Ridiculous

Source: Sonic

On June 23rd, shares of Sonic Corp plunged 10% after the company reported weaker-than-expected earnings for the fiscal third quarter. The fast food chain missed analyst expectations on earnings per share and said it would open fewer new restaurants than it originally anticipated. However, it still managed to beat revenue forecasts.

Investors clearly did not like the results. As of this writing, the stock has shed over 17% of its value -- the market reaction seems overdone.

For all its challenges last quarter, Sonic still posted strong growth in the key metrics that matter most -- namely, comparable sales, which measures sales at restaurants open at least one year, and earnings per share. In addition, poor weather was a significant contributor to the disappointing results, and management expects to see a rebound going forward.

Ringing a familiar toneSonic generated $164 million in revenue last quarter, which topped analyst estimates by about $1 million. Adjusted earnings clocked in at $0.36 per share, just one penny short of analyst expectations. The company also said it will open 22 to 27 new franchised restaurants this quarter, which means full-year new openings will reach 47 restaurants max, short of management's previously stated goal of 50 to 60 new locations.

Sonic pointed to a very familiar theme among companies that depend on consumer spending -- the weather. Many companies across several industries, including restaurants and retailers of all kinds, have cited the weather as the cause of their modest quarterly earnings. In this case, the brutally cold winter not only kept customers at home but also delayed remodeling and relocation efforts.

Context is keyStill, it is important to note that the results were strong, even with the poor weather. Comparable sales grew 6% last quarter, which is strong for the broader industry. McDonald's Corporation, for example, sawsales decline 2.3% last quarter. Meanwhile, earnings per share jumped 26% year-over-year, despite missing Wall Street estimates.

These excellent growth rates signal that consumers still enjoy the core dining experience. Sonic is the largest drive-in restaurant chain in the nation. Going forward, there is plenty of room for growth to continue. Management forecasts still call for mid-single digit same-restaurant sales growth for the full fiscal year, as well as 27% to 29% earnings growth this year.

Resist the urge to sell in panicThe one factor that could justify this dramatic sell-off is its valuation. Heading into the earnings report last month, the stock traded for a lofty 35 times trailing earnings. The stock was up 25% year-to-date.

Due to such bullish action, a decline after missing analyst expectations was not all that surprising. But now the stock is back to a more reasonable valuation level, trading for about 27 times earnings.

This is still a premium to its peer group. For example, McDonald's stock changes hands for 17 times earnings. But as the saying goes, premium companies command premium valuations. If Sonic continues to rack up nearly 30% earnings growth, it can easily grow into its valuation.

Furthermore, Sonic is returning a lot of cash to investors. It is going to buy back $105 million of its own stock this year, which amounts to roughly 7% of its market capitalization. And the company pays a decent 1.3% dividend, so income and growth investors alike should still see plenty of reasons to like Sonic.

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Bob Ciura owns shares of McDonald's. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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