Bear of the Day: Sonic Automotive (SAH)

The market has been on a tear lately, and when that happens, it’s easy to forget that not every stock deserves to ride the wave higher. Eventually, reality sets in, and when it does, stocks with weakening earnings trends tend to get exposed first. We help uncover these types of stocks with our Zacks Rank. Stocks that are not in the good graces of our Zacks Rank have the weakest earnings trends.

That brings us to today’s Bear of the Day, Zacks Rank #5 (Strong Sell) Sonic Automotive (SAH). Sonic Automotive operates as a major automotive retailer in the U.S., selling both new and used vehicles while also generating revenue from financing, insurance, and service operations. On the surface, it sounds like a solid, diversified business. But dig a little deeper, and the cracks start to show.

The biggest issue here is earnings estimate revisions, and not the kind you want to see. Over the last couple of months, analysts have been trimming their expectations for both the current year and next year. That downward pressure on estimates is exactly what drives weaker Zacks Ranks and signals deteriorating sentiment on Wall Street.

Three analysts have dropped their numbers for the current year while two have done so for next year. The bearish moves have slashed our Zacks Consensus Estimate for the current year from $7.05 to $6.54 while next year’s number is down from $7.84 to $7.21.

Why the pessimism? It comes down to the broader environment for auto retailers. Higher interest rates are still biting, making auto loans more expensive and reducing affordability for consumers. That directly impacts vehicle demand, especially on the new car side. At the same time, used car prices have been normalizing, which compresses margins for dealers who were previously benefiting from elevated pricing.

Sonic Automotive, Inc. Price and Consensus

Sonic Automotive, Inc. price-consensus-chart | Sonic Automotive, Inc. Quote

And let’s not ignore the margin story. During the pandemic-era boom, dealerships enjoyed record margins thanks to tight inventory and surging demand. Those days are over. Now we’re seeing margin compression across the industry, and Sonic isn’t immune.

The Automotive – Retail and Whole Sales industry ranks in the Bottom 7% of our Zacks Industry Rank. There are no Zacks Rank #1 (Strong Buy) nor Zacks Rank #2 (Buy) stocks in the industry right now. There are a handful of Zacks Rank #3 (Hold) stocks including AutoNation (AN) and Lithia Motors (LAD).

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This article originally published on Zacks Investment Research (zacks.com).

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