Monday, November 3, 2014

Is Sonic Automotive a Stock to Buy?

Why does Wall Street hate car dealer Sonic Automotive? It's a cheap stock -- its price-to-earnings over earnings-per-share growth, or PEG, ratio is less than 1 -- yet analysts have a consensus hold/sell recommendation on it. Given that Warren Buffett recently bought the largest privately owned car dealership in the U.S., the Van Tuyl Group, is Wall Street missing something with Sonic Automotive?

Car dealerships are about to change

The Internet has changed many aspects of business, and the car retail industry is not immune from its effects. Indeed, Elon Musk is doing everything he can to disrupt the traditional dealer-franchise model by selling Tesla Motors cars directly to customers. Moreover, consumers are increasingly getting used to using pricing information from online sources in order to make more efficient purchasing decisions -- it beats haggling with a salesperson on a car lot.

With these kinds of pressures building on the industry, it's essential that car dealerships adjust to new realities, and the good news is that Sonic Automotive is doing just that. The bad news is that Wall Street doesn't like the uncertainty that comes with change, and there is a lot of it coming at Sonic Automotive.


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