Options Trade of the Week 
Sonic Corporation (NASDAQ:SONC) Calls 
Monday, March 23, 2015

**OPTIONS TRADE OF THE WEEK: Buy the SONC Jun 2015 35.000 call (SONC150619C00035000) at or under $1.80, good for the day. Place a protective stop limit at $0.70 and a pre-determined sell at $3.50.

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by Ian Harvey

Monday, March 23, 2015

Introduction

**Lower Oil Prices A Boon For Sonic!**

The restaurant industry is known for being fiercely competitive, and for those that can turn customers into loyal ones, these companies will certainly benefit. Now these loyal customers, with extra disposable income due to the lower gas prices, will help boost the profit flowing into the fast food chain tills.

One such company that is benefiting from this situation is Sonic Corporation (NASDAQ: SONC), which operates and franchises a chain of drive-in restaurants, comes under the Retail-Restaurants group, and is ranked a powerful 10 on IBD's list of 197 industries.

The company, which requires a steady stream of vehicle traffic to its restaurants, is definitely applauding the decline in oil prices. However, they do not appear to be reliant on this single factor to propel growth.

Along with the above factors, Sonics’ product innovation, growth in core menu items and a national media strategy have all contributed to the company’s strong sales during the quarter – which has been moving upwards rapidly -- its stock price increasing about 57% since September.

The Oklahoma City-based restaurant chain -- known for its retro roller-skating carhops and humorous commercials -- continues to churn out new ideas and new approaches to get people talking and more importantly visiting their stores.

Sonic will be looking to beef up earnings with new menu items and store expansion as it is slated to report fiscal second-quarter financial results Tuesday after the market closes. Consensus is for a satisfying 71% increase in earnings per share, to 12 cents, on a 13% hike in revenue to $123.6 million.

Sonic has done quite well in the earnings picture, having beaten Wall Street earnings estimates three of the last four quarters, and met views the fourth. On March 2, Sonic pre-announced that same-store sales for the Feb. 28-ended quarter grew about 11.5%.

To combat the times when momentum is slow, and project the continual hands on approach to innovation, can be summed up with this comment from the CEO Cliff Hudson:

"We maintained our sales momentum through our seasonally slower time of year and invested in incremental labor to ensure we sustain this momentum going into our seasonally strongest quarters."

And from this type of situation Sonic is now able to announce its first ever double-digit quarterly sales gains as a public company. System-wide same store sales increased approximately 11.5 percent for its second fiscal quarter, which ended Feb. 28.

Hudson said Sonic's success was due to a combination good business strategy, low gas prices and taking business from McDonald's. Sonic is also about authenticity, he added.

"All our food is made to order. We don't make any of the food until the customer orders it," he said. "The customer knows that they can customize every single order and I think that makes a lot of difference."

The restaurant chain is starting to expand in the Northeast, with locations in New York, Massachusetts, Pennsylvania and New Jersey, Hudson said. It also recently announced it has started doing business in its 45th state, Rhode Island.

Technical Oulook

The 52-week high of the stock is $34.44 while the 52-week low is $18.61. According to the latest information available from the exchange, the company has a market cap of $1,723 million and approximately 53,518,000 shares are outstanding.

The firm has price to sales ratio of 3.19 and its price to book per share was 29.28. Its market capitalization was recorded at 1.802 Billion.

Earnings

Sonic last released its earnings data on Tuesday, January 6th. The company reported $0.18 EPS for the quarter, beating the Thomson Reuters consensus estimate of $0.16 by $0.02. The company had revenue of $139.90 million for the quarter.

During the same quarter in the prior year, the company posted $0.13 earnings per share. The company’s quarterly revenue was up 10.4% on a year-over-year basis. Analysts expect that Sonic will post $1.00 EPS for the current fiscal year.

Not only did Sonic increase system-wide same-store sales for its second fiscal quarter, which ended February 28, 2015, by approximately 11.5%, the same-store sales reflected an increase of approximately 11.3% at company drive-ins and approximately 11.5% at franchise drive-ins.

Positive Drive

• Drinks have been a big part of Sonic's growth strategy, with the company letting people mix and match flavors and offering them at half price between 2 p.m. and 4 p.m. The company says drinks now represent 30 percent of its total sales.

Sonic last month announced that, as in years past, it will expand its usual 17-milkshake menu to 25 flavors over the summer, and invited customers to create their own custom-flavored shakes.

• Sonic, which has more than 3,500 locations, also offers plenty of lower-calorie drink choices, such as sparkling water with the option to add in various fresh fruits and flavors.

• Last summer, Sonic Drive-In launched a line-up of Slush drinks with Nerds candy (sold by Nestle under the Willy Wonka Candy Company label) mixed in. They were so popular the chain says some people ask to get the crunchy little candies mixed into other drinks, like soda.

• And given their success, CEO Cliff Hudson says Sonic is looking at adding a second candy-drink mashup this summer, although no details are available as yet.

• More broadly, Sonic has been increasing sales in part by revamping recipes, such as for its chicken sandwich, and on March 5, it added spicy "Super Crunch" chicken strips to its menu . In the most recent quarter that ended on Feb. 28, the company said sales rose 11.5 percent at established locations. That's following an 8.5 percent increase in the previous quarter, and a 3.5 percent increase for its last fiscal year.

• Meanwhile, on Feb. 11, Sonic announced two new franchisees in Rhode Island, its 45th state. From its traditional South and Central Plains locations, it's expanding in the Northeast. The first Rhode Island Sonics are slated to open in midsummer.

• Sonic has “the drive-in experience” -- "America's Drive In" – which is something that most other chains offering the same type of food items do not have. You simply pull up, press a button when you are ready to order, and then have your food delivered to you by a car hop. It has an old time-y charm to it that is a refreshing change from the standardized assembly line experience of most fast food restaurants.

• Now a first for the company history, according to BusinessWire, Sonic will begin issuing a quarterly dividend -- $0.09 per share each quarter. In total, that is $0.36 per share annually which at current prices is a yield of 1.1%, which is not an outstanding yield, but is a promising start, helping to add value to the Sonic shares.

• Also, the company would be starting a $105 million share repurchasing program for fiscal 2015. This of course adds more value to the shares outstanding in the market, and also shows that the company believes in its own performance.

• The hedge fund Hilton Investment has started a new position in Sonic with the purchase of $32 million worth of shares according to marketrealist.com. This position seems to show conviction from the hedge fund as it represents greater than 1% of their total holdings.

Analysts Opinions

Will Slabaugh of Stephens on Wednesday, March 11th reiterated an Overweight rating on shares of Sonic Corporation with a price target raised from a previous $32 to $34 ahead of the company's second quarter report.

"Sonic's string of impressive same-store sales results has driven consistent upside to estimates, along with multiple expansion and a recent all-time high in the stock price (though it has modestly retreated since then)," Slabaugh wrote. "Nevertheless, we believe the fundamental drivers of menu innovation and marketing efficiencies remain in place and should lead to an impressive second quarter and fiscal 2015."

Slabaugh expects Sonic to report a same-store sales growth of 6.1 percent while earning $0.09 per share on revenue of $120.8 million.

The analyst notes that Sonic has been the most effective quick-serve restaurant player in marketing its brand strength through menu offerings which include a broader and more distinct flavor than its peers. As such, Sonic's second quarter sales will benefit from new offerings including the launch of its "Lil' Doggies" and "Lil' Chickies' snacks and its "French TOASTER Breakfast Sandwich."

Oppenheimer raised its price target on Sonic Corporation Tuesday 3rd March from $32 to $38 and maintained an Outperform rating.

Analyst Brian Bittner noted that the company pre-announced double-digit SSS for the fiscal second quarter, which was especially encouraging as the company headed into the March to August timeframe, which accounts for 70 percent of annual earnings.

The fiscal Q2 comps came in at +11.5 percent versus Street estimates of +6 percent, with traffic as the "main contributor," according to Bittner.

Based on the second quarter performance and momentum from digital menus, a new smartphone app and enhanced advertising, Bittner raised estimates for 2015 EPS from $1.05 to $1.10 and 2016 estimates from $1.25 to $1.28. The Street had estimated $1.03 and $1.20, respectively.

Discussing margins, the analyst explained that "restaurant margins could be held in check when SONC reports full earnings owing to unquantified ‘labor investments' and mid-single-digit food inflation.

"However," he wrote, "food costs dynamics should be less of a headwind in 2H, and we still expect at least 100bps of restaurant margin expansion."

Bittner concluded that Sonic was a story with "strengthening legs."

The $38 price target was based on 14x estimated 2016 EBITDA.

A number of other research reports have been presented recently, these are as follows:-

• Sonic Corp. has received a Buy rating from First Call Corporation, a division of Thomson Reuters. The rating information was disclosed in the equity research recommendation.

• Sonic had its price objective raised by Barclays from $20.00 to $23.00 in a research report released on Wednesday, 7th January. Barclays currently has an underweight rating on the stock.

• Analysts at Wunderlich reiterated a buy rating on shares of Sonic in a research note on Wednesday, 7th January. They now have a $33.00 price target on the stock, up previously from $28.00.

• Finally, analysts at Telsey Advisory Group upgraded shares of Sonic from an underperform rating to a market perform rating in a research note on Wednesday, 7th January. They now have a $30.00 price target on the stock, up previously from $23.00.

Sonic Corp. stock has received a short term price target of $ 32.64 from 11 Analyst. The share price can be expected to fluctuate from the mean short term target, can be seen from the standard deviation reading of $5.61. The higher estimate of target price is $39.00, while the lower price target estimate is $24.00.

Conclusion

The company has shown staying power in the form of increasing same store sales growth, and a rotating list of new menu items. Unique and funny marketing campaigns have always remained at the core of the strategy for Sonic as they roll out their popular improvised commercials featuring two male actors visiting their restaurants. Sonic has also taken on a major sponsorship roll in critical basketball games leading up to the NCAA March Madness Tournament. They remain visible at all times, and are a key part of American dining life.

On top of cheaper oil, an offer of a unique experience offered to customers, loyalty build-up with repeat patrons, combined with the fact that hedge funds are willing to put big money into the stock, and the company is issuing its first dividend ever and repurchasing shares, this options trade seems to be sound.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE OF THE WEEK: Buy the SONC Jun 2015 35.000 call (SONC150619C00035000) at or under $1.80, good for the day. Place a protective stop limit at $0.70 and a pre-determined sell at $3.50.


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