This Analyst Cuts Sonic Automotive's Earnings Estimates & Price Target Citing Lower Industry Volume Assumptions

Benchmark analyst Michael Ward reiterated a Buy rating on the shares of Sonic Automotive Inc SAH and lowered the price target from $71 to $62.
The analyst said dealers are likely to carry 30% less inventory going forward than in the past, shifting from a discount model to a prestige relationship with consumers, resulting in higher levels of variable gross margin.
In the meantime, Ward said Sonic and the rest of the group should continue to generate record levels of operating cash, enabling growth investment and returns to shareholders.
He expects the company to generate $1.2 billion in combined operating cash flow in 2022 and 2023, or about 70% of the current market cap, enabling elevated returns to shareholders and growth investment.
Sonic Automotive reported Q3 earnings per share of $2.23 versus $1.95 a year ago, missing the Street view of $2.47.
He cited that the U.S. light vehicle sales have been below trend since the COVID-19 shutdown and more recently sales have been restricted by component shortages that have limited production.
Tight supply has limited sales expansion and has largely eliminated the historical seasonality of demand.
Strong underlying demand, ongoing supply shortages and capacity constraints will limit inventory addition to about 100,000 units a month, extending the replenishment cycle into late-2023 or early-2024, Ward noted.
He lowered the FY22 earnings assumption to $9.10 per share, down from $9.65 per share, to reflect lower third-quarter performance and reduced volume assumptions.
Price Action: SAH shares are trading lower by 0.49% at $47.02 on the last check Monday.
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