Sonic (SONC, $16.40, down $0.60) is trading lower this morning on a downgrade by Credit Suisse to “Neutral” from “Outperform,” citing weaker demand and higher costs could cause the company to miss its same-store sales targets. Cheesecake Factory (CAKE, $17.00, down $0.27) also got the exact same downgrade.
The stock had been in a long-term uptrend over the past decade and had consolidated between $18-$24 over the past few years. However, that trend was broken when Sonic recently lowered its full-year earnings outlook due to lower-than-expected 3Q results. They announce earnings 6/24.
The company now anticipates growth of 9%-12%, down from its prior 15%-17% growth forecast. This equates to a 2008 profit of $1.06 a share while Wall Street had expected full-year earnings of $1.11. The stock fell 10% that day and closed below $20.
Sonic was doing great and looked poised to challenge its 52-week high of $26 despite tough economic conditions. The problem was that Sonic gave a rosy forecast in a prior quarter and simply overestimated its own growth. Maybe Sonic failed to factor in the rising commodity and labor costs or they did and underestimated those numbers. Either way, the stock is now sitting at multi-year lows.
Usually when a stock follows a trend of events that favors a lower stock price, there’s no need to get excited about it over the near-term. But longer-term, Sonic should bounce back. It is a “regional play” with many of its drive-in restaurants located in the south central part of the U.S. Some question the drive-in stratedgy concept but Sonic really is a growth story that could do well in a saturated fast-food market.
Let’s wait for the dust to settle on this one before looking at a long position. I like the company too much to short the stock or to buy puts. When things get back on track with the stock and we start to see some real growth then maybe there’s a chance to buy longer-term calls. I don’t see any listed call LEAP options on Sonic and the furthest out are the December contracts right now. There is slight volume on the December 20 calls (ZSQLD, $0.70, down $0.25) as we speak but let’s see how Sonic reacts over the next few quarters before going long.
Rick Rouse
Rick@OptionsMentoring.com
