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Sonic (SONC) PT Lifted To $10 By RBC Capital, 'Outperform' Maintained

 March 22, 2012 01:32 PM

RBC Capital Markets analyst Larry Miller increased his price target on shares of Sonic Corp. (NASDAQ:SONC) to $10 from $9, while maintaining its "Outperform" rating.

The brokerage raised its 2012 EPS estimate to $0.55 from $0.54, while maintaining its 2013 estimate of $0.63. Miller says Sonic remains a "show me" story with a favorable risk/reward profile.

Sonic showed another quarter of improving sales, with system-wide comps up 3.5% (a 700 basis-point two-year improvement).

While sales benefited from Leap Day (about 1.0%) and unseasonably warm weather, this represents an improvement on both a one and two-year basis from last quarter. Sustainability is the key question given more difficult back-half comparisons, thus SONC remains a "show me" story.

[Related -Futures Rebound As Liquidity Concerns Ease; Barnes & Noble, Inc. (BKS) Plunges]

Sales could remain positive as a result of more effective marketing (re-launch of its successful two-guys media campaign in late February with a focus on driving growth in its five day parts), more media impressions, more new product news, and/or an improving U.S. economy.

Improving sales are a panacea for SONCs business model as earnings would benefit from expanding company margins, rising royalty rates, rising franchise profits, and resumed franchisee unit growth.

Sustainable sales growth would also result in multiple expansion. Additionally, in Miller's view, the downside is limited by the consistent cash flow nature of Sonic's franchised business model coupled with a cheap valuation.

SONC is trading down 5.47at $7.61 on Thursday.

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