Monday, June 13, 2011

Sonic Corporation (NASDAQ: SONC) Q3 2011 Price Target

Recent price: 9.71$
P/E Ratio: 22.01
3 Months Target Price: 12$

Company Description
According to data provided by Reuters, Sonic Corp. operates and franchises chain of drive-in restaurants (Sonic Drive-Ins) in the United States. Sonic Drive-Ins feature Sonic signature items, such as specialty drinks including cherry limeades and slushes, frozen desserts, made-to-order sandwiches and hamburgers, footlong quarter pound chili cheese coneys, hand-battered onion rings, tots, salads, and wraps. Sonic Drive-Ins also offer breakfast items that include sausage or bacon with egg and cheese Breakfast Toaster, or CroisSONIC breakfast sandwiches, and breakfast burritos. Sonic Drive-Ins serve the full menu all day. As of August 31, 2010, the Company had 3,572 Sonic Drive-Ins in operation from coast to coast, consisting of 455 Company-owned Drive-Ins and 3,117 Franchise Drive-Ins. Company-owned Drive-Ins are owned and operated by Sonic Restaurants, Inc. (SRI), a wholly owned subsidiary of the Company.

Confidence Margins
Strong resistance $13.11 (+35%)
Light resistance $11.86 (+22%)
Light support $8.50 (-12%)
Strong support $7.30 (-25%)

Sonic Corporation is a very profitable company. One should keep in mind however that the company is using a very high level of financial leverage. It has also raised more debt recently. If the company's management does everything well, this restaurant chain will provide fairly good returns by the end of the third quarter 2011.

Entry strategy
For the cautious investor:
Buy the stock for 10$ or less.

For the risk-taking trader:
The September 2011 10$ out-of-the-money call option contract seems to be the right position to take, they can be acquired for about 85$ per contract.

Exit Strategy
For the cautious investor:
Sell when the stock reaches 12$, or keep it until 13$ if you are more bullish in your own analysis.

For the risk-taking trader:
The contracts should be kept until the underlying reaches 12$. This should provide a very interesting return if the underlying reaches the target price as the contracts will get in the money.

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