Why Sonic Corporation Stock Spiked Today

What happened

Shares of Sonic Corporation (NASDAQ: SONC) were flying higher today after the fast-food, drive-up chain reported preliminary third-quarter results and said it would increase share buybacks. The stock rose throughout the day and closed up 16.4%.

Image source: Sonic.

So what

Sonic said that same-store sales in the third quarter were flat and maintained its guidance for the second half of the year, seeing comps up between 0% and 2%. It also reiterated full-year earnings per share guidance of $1.43-$1.50.

CEO Cliff Hudson said that same-store sales accelerated throughout the quarter, finishing in May with 2.5% growth, which seemed to elicit cheers from the market. He added:

Our focus on everyday value and refreshed marketing initiatives are resonating with guests and advancing our efforts to drive traffic and increase sales. We also remain focused on integrating technology into our guest experience with the ongoing rollout of mobile order ahead, making the Sonic customer experience the most personalized in the QSR industry.

Separately, management announced a new share-repurchase authorization of $500 million, replacing a $160 million program. The company now has $390 million left under the new authorization to buy back stock, which is equal to about a third of its market cap. The increased buyback authorization came as the company recently refranchised 41 restaurants, making its store base 95% franchised. Management seems to think that buying back shares is a good way to use that cash as it looks to leverage its asset-light model.

Now what

A 16% pop on what’s essentially reiterated guidance and an increased share-buyback authorization is a little surprising, but investors seem to believe the stock is undervalued after shares have traded sideways for the last three years. The size of the authorization also indicates that the company could buy back shares aggressively, which will lift earnings per share.

However, I’d prefer to see more fundamental improvements in the business, including faster comparable-sales growth, though that may happen if the momentum from May continues.

We should learn more on June 26 when Sonic is expected to release its complete third-quarter earnings report.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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