Sonic Corp.’s (SONC) board of directors recently sanctioned a repurchase program of up to $30 million worth of common stock through August 31, 2012.
Sonic will exercise the program opportunistically in the open market or in negotiated transactions, depending on share price and other macro factors.
As of October 13, 2011, Sonic had 61.9 million in shares outstanding and the shares of the company were trading at $7.36. The stock had historically traded between $11.86 and $6.35 in the last 12 months.
Apart from bolstering shareholder value, this strategic move will also lift the relatively undervalued share price. Moreover, the step is also a perfect medium for the use of excess cash.
Oklahoma-based Sonic, the nation's largest chain of drive-in restaurants, grew its business and enhanced shareholder value through a multi-layer growth strategy. Management expects positive same-store sales in 2012, driven by sales-building initiatives and the introduction of products. It also expects to generate approximately $35 million to $40 million in free cash flow in fiscal 2012, backed by a solid franchise model as well as a long-term financing plan.
Sonic exited the third quarter of 2011 with $96.4 million in current assets, $521.6 million in long-term debt due after one year and $37.9 million in shareholders’ equity. During the quarter, the company also successfully completed its debt refinancing, which will further boost its free cash flow position.
While the latest share buyback program is an attempt to reward shareholders, current investor focus is on the disappointing comparable store sales in the fourth quarter. After announcing positive comps of 1.2% and 3.9% in the second and third quarters, respectively, the recent decline of 0.5% pinched investors’ sentiment.
Sonic currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock. One of its competitors, Morton's Restaurant Group Inc. (MRT) currently retains a Zacks #2 Rank, which translates into a short-term Buy rating.
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