Option Trade - Sonic Corporation (NASDAQ:SONC) Calls 
Saturday, June 20, 2015

**OPTION TRADE: Buy the SONC Sep 2015 35.000 call (SONC150918C00035000) at or under $1.10. Place a protective stop loss at $0.45, and a pre-determined sell at $2.20.

by Ian Harvey

June 20, 2015

Introduction

Sonic Corporation (NASDAQ: SONC), a company that operates and franchises one of the largest chain of drive-in restaurants in the United States, is set to report third quarter earnings after the market closes on Monday.

Wall Street analysts are expecting profits of 36 cents per share for the quarter, an improvement from the 30 cents it reported in the same quarter of last year.

Revenue is expected by analysts to come in at $164.17 million, up from the $152.19 million Sonic posted a year ago.

Shares of Sonic Corp were up 2.43% to $33.36 on heavy volume in afternoon trading Friday.

The Oklahoma City, Okla.-based fast-food chain continues to do a remarkable job of separating itself from the fierce competition that exists among its sit-in restaurant rivals.

Technical Details

Sonic Corp has a 52 weeks low of $20.25 and a 52week high of $36.73.

Sonic Corp’s share price has increased by 3.28% in the last 75 days and it’s now in smooth bullish uptrend.

Earnings

The revenue growth came in higher than the industry average of 7.4%. Since the same quarter one year prior, revenues rose by 15.0%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.

Sonic Corp reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. This trend should continue and suggests that the performance of the business is improving.

During the past fiscal year, Sonic Corp increased its bottom line by earning $0.85 versus $0.64 in the prior year. This year, the market expects an improvement in earnings ($1.09 versus $0.85).

The gross profit margin is considered to be strong for Sonic Corp at 36.91%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 6.07% trails the industry average.

Future Earnings

For the quarter that ended in May, earnings are projected to climb 20% to 36 cents per share, while revenue is expected to be $164.17 million, up 7.5%. For the full year ending in August, earnings are projected to climb 29% to $1.09 per share, while revenue is forecast to come in 10% higher at $605 million.

The fact that both quarterly and full-year earnings are projected to climb at almost three times the rate of revenue growth underscores how effective Sonic's efforts to grow its profit margins have been. This explains why, despite its expensive valuation, Sonic still has a consensus buy rating and an average 12-month price target of $38, around 18% higher than its current levels.

Why Sonic Corporation?

Powered by its strong earnings growth of 100.00% and other important driving factors, this stock has surged by 41.03% over the past year, outperforming the rise in the S&P 500 Index during the same period.

Unlike, say, McDonald's (MCD) , whose restaurants are designed for customers to sit and eat, Sonic's drive-through/drive-in business model relies on customers eating in their cars or taking their food with them. This helps Sonic keep its overhead and labor costs lower since -- for instance -- employees don't have to clean tables or mop dining-area floors after meals.

Moreover, given the smaller amount of space a Sonic needs, it can operate its restaurants with a lower number of employees per shift and considerably lower operational costs like air conditioning and electricity, among other expenses.

The success of this thin model is reflected in Sonic's share price, which is up more than 16% year-to-date, and up more than 45% over the past twelve months, far outpacing the broader averages. Longer term, investors who bought Sonic shares three years ago and and held them have seen their value skyrocket 236%, compared to 57% gains for the S&P 500 (SPX) during that period.

When compared with the valuation of the S&P 500, which trades at a P/E ratio of 21, Sonic stock is not cheap at its current P/E of 32. Still, with the company embracing a mobile strategy to speed up customer orders and cut down even further on labor costs, Sonic's profit margins are poised to expand in the quarters and years ahead.

The 62-year old company is in the midst of what it calls a "multi-layered growth" plan that it expects to complete by 2017, which includes new point-of-sale systems and digitizing its menu boards. To the extent these initiatives can drive higher revenue and boost same-store sales, Sonic shares -- despite being relatively expensive now -- will still be able to produce healthy gains.

Hedge Funds Ownership

Information from Q4 2014 13F SEC filings, show 190 hedge funds hold Sonic Corp. The institutional ownership of the firm in Q4 2014 is high, at 99.52% of the shares outstanding. As of that quarter these hedge funds owned 51.75 million shares. A total of 51 funds opened new positions in Sonic Corp and 52 increased their holdings. There were 18 funds that closed their positions and 73 that reduced them.

As disclosed by SEC’s 13F filings, two registered investment managers hold the company in their Top 10 stock portfolios. These funds are: Ranger Investment Management L.P., Ah Lisanti Capital Growth Llc.

Analysts Opinions

Sonic (NASDAQ:SONC) was upgraded by analysts at Zacks from a hold rating to a buy rating in the last week. The firm currently has $35.00 target price on the stock.

According to Zacks,

“Sonic Corp. operates and franchises one of the largest chain of drive-in restaurants in the United States. Sonic restaurants offer made-to-order hamburgers and other sandwiches and feature Sonic signature items, such as footlong coney cheese dogs, hand-battered onion rings, tater tots, specialty soft drinks, including cherry limeades and slushes, and frozen desserts. At a typical Sonic restaurant, a customer drives into one of 24 to 36 covered drive-in spaces, orders through an intercom, and has the food delivered by a carhop within an average of four minutes.”

Separately, TheStreet Ratings team rates SONIC CORP as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:-

"We rate Sonic Corp (SONC) a HOLD. The primary factors that have impacted our rating are mixed, some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth and compelling growth in net income. However, as a counter to these strengths, we find that the company's profit margins have been poor overall."

Conclusion

The restaurants chain operator is expected to deliver a record quarter, with historically high earnings of $0.37 per share.

These estimates imply a 23 percent year-over-year increase in earnings, and a 7.3 percent surge in sales, as the company reported earnings of $0.30 per share on revenue of $152.2 million in the third quarter of 2014.

In addition, Sonic has a history of meeting estimates.

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


**OPTION TRADE: Buy the SONC Sep 2015 35.000 call (SONC150918C00035000) at or under $1.10. Place a protective stop loss at $0.45, and a pre-determined sell at $2.20.



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Options traders win because they are successful.



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