Unlike the slimy voices you often hear on Wall Street, I’m not going to conjure up a game of word salad to present car dealership Sonic Automotive (NYSE:SAH) as an excellent idea. Obviously with a SAH stock down 29% year over year it would have been better to buy shares of the benchmark SPDR S&P 500 ETF To trust (NYSEARCA:SPY† At the moment, however, the SAH stock is significantly undervalued.
Let’s get the bad news out of the way first. A quick look at the charts shows that not many individual securities have performed well this year so far. It is clear that the main negative catalyst for the malaise is inflation. Since January 2020, the purchasing power of the dollar fell by nearly 12%. For context, between early 2013 and late 2019, the dollar lost 10.4% in purchasing power.
This dynamic translates into a horrifying realization that the coming months and possibly years could be economically traumatic for households. Core consumer confidence values have fallen significantly. Even the concept of revenge travel is failing, with analysts getting very bearish especially on cruise ships. That’s why the story for SAH stocks — essentially underlining the second-largest purchase for most households — is admittedly disturbing.
Still, this is why risk-tolerant adversaries may not want to give up Sonic just yet.
SAH stocks are fundamentally undervalued
Interestingly, when you zoom in on Sonic’s financial picture, you are usually confronted with very positive fundamentals fundamental metrics. The most glaring issue with the company is its Sloan ratio of nearly 27%, which could indicate: poor quality of income† However, the other signs point to an optimistic profile of SAH stocks.
For example, the company profitability stats are very strong. Admittedly, you would expect that given the unique nuances of the coronavirus pandemic. However, key indicators are well above industry standards. Take a look at Sonic’s return on equity as an example. At 39.3%, it is well above 6.1% of the sector median.
Further, according to Gurufocus.com’s assessment, SAH stock is “significantly undervalued.” By utilizing a basket of valuation stats, SAH can provide an upside opportunity for those willing to take a chance now. To delve deeper into the details, you can refer to the forward P/E ratio of 3.4 times, which is well below the industry median of 9.6 times forward P/E.
Another popular tool is the price-to-earnings ratio (PEG), which helps investors value a unit of equity by considering the underlying company’s market price, earnings performance, and future growth prospects. For SAH stocks, the PEG is at 0.72, again noticeably lower than the industry median of 1.8.
Yet there is an argument that assessing valuations can sometimes lead to fun math tricks that do not correspond to reality. And reality at this point seemingly dictates that consumers don’t feel like buying cars, new or used.
Does that mean trouble for Sonic? Frankly, it could. However, if you’re up for speculation, you should consider the cynical angle.
Sonic Automotive responds to harsh reality
While the Covid-19 crisis has thrown some paradigms into disarray, the fact is that according to Statista’s Global Consumer Survey, 76% of American commuters use their own cars to move between home and work. At some point, companies like Sonic Automotive can become fully relevant again.
But hold on — what about the permanent shift to working from home? Frankly, I find it hard to believe that companies will let their employees telecommute unless they mean handing out early retirement packages. While Elon Musk was recently making noise about want his employees back in the officethe clock may be ticking for work-from-home privileges.
The second harsh reality that fits cynically well with SAH stocks is that the cars on american roads are older than ever† specifically 12.2 years according to an updated Wall Street Journal article.
To be fair, the above dynamics have forced households to consider repairing their rides rather than paying high rates for a new (or new to them) vehicle. At some point, however, the economics of auto repair doesn’t make much sense, especially for out-of-warranty cars.
In a sense, you can think of the dynamics of vehicle aging as a pent-up potential demand. Once the pressure hits the breaking point, the SAH stock could potentially rise.
Not an easy road trip
While there may be a lot of positives about acquiring SAH stock right now, I’m under no illusions. Based on the losses absorbed from the start of the year, I would be surprised if Sonic Automotive moves back into positive territory. So no bonus points for me.
Nevertheless, for the contrarian investor looking for a good deal right now, you may want to check out SAH stocks. The financial stats are largely pointing in the right direction and while the fundamental story is risky, there is some sensitivity to it.
As of the publishing date, Josh Enomoto had no (direct or indirect) positions in the securities referred to in this article. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com Publication Guidelines†