Don’t Be Fooled by Sonic Automotive Inc (SAH)’s Delayed SEC Filing

In a surprising move, Sonic Automotive Inc. (NYSE:SAH) filed an application with the Securities and Exchange Commission seeking more time for filing its annual report. Usually, companies follow this route in the event of material impact of an acquisition or other similar development on the finances. It was thus natural for the market to get unnerved by the notice of late filing and the stock lost as much as 8% in intraday trade Mar. 8.

However, the third largest auto dealer network in the US said the delayed filing is because of weak accounting controls at its dealerships. The company also stated it does not expect its financial results to be different from what it announced last month. This temporary weakness appears to be a blessing in disguise as major auto dealers have been benefiting from robust auto sales. Sonic Automotive Inc. (NYSE:SAH) itself has advanced nearly 13% since the starting of the year, but still trades at a forward price earnings multiple of just over 10. The market is obviously considering it a negative, but Bank of America’s observation that the recent developments are “not as negative as initially perceived by the market” puts things into perspective.

Sonic Automotive is part of the largest auto retail network in the U.S., which also includes Penske Automotive Group, Inc. (NYSE:PAG) and AutoNation, Inc. (NYSE:AN). As such, Sonic Automotive Inc. (NYSE:SAH)’s fortunes are in close relation to these companies. Penske Automotive is the second largest auto retailer in the country, but for all practical purposes, it can be considered a specialized player given its very high focus on luxury brands. Last year, the network saw nearly 49% of its revenues coming from just Mercedes, BMW and Audi. That is without considering other brands such as Porsche, Acura, and Jaguar. As a result, Penske Automotive enjoys rich valuations. This was once again highlighted after the company reported a 19.5% jump in adjusted profits for the latest quarter while revenues grew 18%. In light of the strong results, KeyBanc has upgraded the stock to $36 compared to the market price of $32.8.