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Sonic sees strongest session in years, and valuation's looking rich

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Sonic Looks to Conquer Tougher Markets on Encouraging Q1 Results

Sonic (SONC) was having its best day in years Tuesday after the drive-in chain got past analysts' earnings targets and retained its profit goals for the current year, but its value was reaching rarefied air as a result.

In recent trading, Sonic was adding 11% at $23.24 on heavy volume, and earlier, it went as high as $23.51. The last time the Oklahoma City-based burger and fries seller moved up more in a session was April 2011. Ahead of trading, it had tacked on 3.6% in 2014, but now it's showing a gain of more than 12%, well in excess of the 1.4% average advance of 42 restaurants tracked by Yahoo Finance.

Sonic, a volatile stock in recent years, was stellar in 2013, nearly doubling with a climb of 93.9%. Several other fast-food burger shops also surged last year, including Jack in the Box (JACK), up 75%, Wendy's (WEN), ahead by 86% and Burger King (BKW), better by 39%. McDonald's (MCD), in comparison, managed a 10% gain, around the same move as large BK franchisee Carrols Restaurant Group (TAST).

The latest buying in Sonic came after it earned 7 cents a share in the second quarter, a penny better than analysts had forecast. Revenue of $109.7 million was slightly below the $110.3 million mean prediction, whereas the 1.4% increase in same-store sales was short of the 1.5% consensus view. The winter weather that hit many retailers and restaurants might have played a role. However, average sales at both company-operated stores and franchised locations were higher than the prior-year second quarter for Sonic, which has been paring the number of corporate units over the years.

With disaster averted, Sonic repeated its earlier projection that adjusted earnings for the current fiscal year should grow 14% to 15% from last year's 72 cents. Wall Street is calling for 83 cents. It also still thinks same-store sales will have a low-single-digit improvement. Considering short interest is at 7.4% of the float, traders covering positions may be factoring in to Tuesday's gain, although that's not an outsized amount, coming in right at the restaurant industry average.

Pricey burger?

All that said, Sonic's continuing path higher has taken the stock to arguably expensive territory, relative to its past, at any rate. Because of the buying spree, the shares carry their highest forward multiple of the past five years, according to FactSet data. Its price-to-earnings ratio on expected earnings for the next 12 months is 25.2, outpacing the 15.5 average of the last half-decade. Following Monday's close, the five-year high was just under 25. Certain other measures, including price/earnings to growth, price to sales and enterprise value to EBITDA are similarly at or near five-year peaks.

In fairness, at least as far as the earnings multiple goes, Sonic's not out of line with the industry, which was recently right above 27, or with other burger outfits. Of all the restaurants tracked, they jumped 54% on average last year, partly thanks to money managers seeking growth, and beef-heavy chains were even better. Though restaurants aren't keeping up that pace so far in '14, they are topping the market's overall rate.

A number of the stocks reached all-time highs last year or in the first months of this year, but Sonic wasn't among them, even with its massive push ahead. Its best close came in October 2007, at $25.65. Still, it hasn't finished a trading day above $23 since 2008, and it's currently on track to do that.

To keep going from here, though, it needs to continue justifying the valuation and the fact that it's now bolted past analysts' price target of $21.82. A rich value relative to one's peers is perfectly fine if the business performance backs it up in this case, that might just require an awful lot of chili cheese tots.