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Here's Why We Think Sonic Automotive (NYSE:SAH) Is Well Worth Watching

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It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.

If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Sonic Automotive (NYSE:SAH). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.

Check out our latest analysis for Sonic Automotive

How Fast Is Sonic Automotive Growing Its Earnings Per Share?

In the last three years Sonic Automotive's earnings per share took off like a rocket; fast, and from a low base. So the actual rate of growth doesn't tell us much. Thus, it makes sense to focus on more recent growth rates, instead. Like a firecracker arcing through the night sky, Sonic Automotive's EPS shot from US$4.79 to US$9.92, over the last year. You don't see 107% year-on-year growth like that, very often. The best case scenario? That the business has hit a true inflection point.

Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. I note that Sonic Automotive's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. Sonic Automotive maintained stable EBIT margins over the last year, all while growing revenue 29% to US$13b. That's a real positive.

You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.

earnings-and-revenue-history
earnings-and-revenue-history

Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Sonic Automotive.

Are Sonic Automotive Insiders Aligned With All Shareholders?

Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.

One gleaming positive for Sonic Automotive, in the last year, is that a certain insider has buying shares with ample enthusiasm. Specifically, the , Paul Rusnak, accumulated US$5.5m worth of shares around US$41.87. It doesn't get much better than that, in terms of large investments from insiders.

On top of the insider buying, it's good to see that Sonic Automotive insiders have a valuable investment in the business. Notably, they have an enormous stake in the company, worth US$522m. Coming in at 28% of the business, that holding gives insiders a lot of influence, and plenty of reason to generate value for shareholders. Very encouraging.

Does Sonic Automotive Deserve A Spot On Your Watchlist?

Sonic Automotive's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. The cherry on top is that insiders own a bunch of shares, and one has been buying more. This quick rundown suggests that the business may be of good quality, and also at an inflection point, so maybe Sonic Automotive deserves timely attention. Even so, be aware that Sonic Automotive is showing 2 warning signs in our investment analysis , you should know about...

There are plenty of other companies that have insiders buying up shares. So if you like the sound of Sonic Automotive, you'll probably love this free list of growing companies that insiders are buying.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.