Sonic

By Malcolm Berko

February 12, 2014 5 min read

Dear Mr. Berko: We were vacationing in Miami and stopped at a Sonic drive-in to order lunch. I was surprised by how quickly the food came out and how good it tasted. My teenage kids, who had never been to a Sonic, think it's better than McDonald's. Please tell me whether you would recommend the stock, as I could speculate with 1,000 shares. I may also be interested in opening a franchise for my 26-year-old son, a college graduate who, because he can't find a high-paying job, may go back to school and get a master's degree. I'm thinking that with a college degree, he ought to be able to run a fast-food business. I am in the real estate business and own two commercial properties here that could be a good location for this type of business. — HE, Ann Arbor, Mich.

Dear HE: Sonic (SONC-$18.49) may be the only fast-food restaurant that sells corn dogs. Sometimes I'll add a little mustard or a dollop of ketchup, and they are so mmm, mmm good. But when I dip the corn dog in the mayonnaise jar, it's mmm, mmm better.

SONC, with 3,603 locations in 44 states, is home-ported in Oklahoma City, where the air is clean, the streets are wide, the people are friendly and a water taxi costs a sawbuck. Originally opened as the Top Hat Drive-In in 1953, SONC is the largest chain of drive-in restaurants in the nation. Most of them employ young carhops on roller skates to bring out your food. And the food at the locations I've visited is outstanding, especially the scrumptious toaster sandwiches stacked on thick slices of Texas toast, and the chocolate milkshakes are heavenly. Or, on a hot summer afternoon in OKC, consider a squeaky-fresh limeade. And though there are SONC locations in Detroit and Milwaukee and other cold places, I believe that the Miami unit where you lunched does a far better business than a northern location where it snows and temperatures can stay below freezing for weeks. That makes for tough roller skating service. But some of the wiser folks at corporate on Johnny Bench Drive can give you a better-informed opinion and back it up with facts and figures.

If your college-educated son doesn't have the drive to find a high-paying job, then he may not have the drive to be a successful SONC franchisee, which is terribly hard work. Most college degrees today aren't worth a miser's coin! Very little of what kids learn in college grooms them to be attractive to an employer or prepares them for the reality of making a living. And successfully managing a Sonic restaurant requires a lot more brains than earning a college diploma.

Now, though I can't knowledgeably advise you on a franchise for your son, I can knowledgeably tell you that I don't think SONC would be a good investment. Revenues for 2013 were $542 million, and they have continued to decline annually from a high of $804 million in 2008. And it's also telling to note that revenues 10 years ago were a middling $537 million. So SONC will have to open a lot of new franchise units to improve on its 2008 numbers. I hope it does, but I'm not confident it can. Net income has been up and down like a teeter-totter, and net profit margins crashed by 50 percent during the past decade. Management can't seem to get its revenues and earnings out of neutral. I don't care for the industry, and I don't like the stock, which is trading at a much higher price-earnings ratio than its competitors whose net profit margins are twice as high as SONC's. I suspect that this is a case in which the menu is better than the management.

But most on the Street disagree with my conclusion. Value Line strongly recommends SONC and suggests a price objective of $35 in the next few years. Thomson First Call has a 12-month target of $24. Market Edge is very bullish, and so are Zacks, Bank of America and Wells Fargo.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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