Introduction
For the next few days, we’re going to talk about a company called Sonic Corp, or Sonic. Sonic is a publicly traded company, listed on the NASDAQ, trading under the ticker symbol SONC. Sonic owns or franchises a chain of just under 2,900 drive-in restaurants. These restaurants are located across the southern US, with a large concentration in Texas, Oklahoma, Arkansas, and Tennessee.
Quick Check
Before spending time analyzing a company, it makes sense to screen it based on quality criteria: consistent sales, earnings, pre-tax profit margin and ROE. Pricing issues such as PE ratio, etc. can follow later. If you have Toolkit or Stock Analyst, you can quickly load Sonic into the program (using OPS or manually entering the data) and to a quick visual analysis to see if this company is well behaved.
Sales: SONC appears to have consistent growing sales over ten years
Earnings: though it had a glitch in 1996, SONC has had consistent and growing earnings for eight years. Earnings track sales.
Pre-tax profit margin: The pre-tax profit margin from Sonic has been a health 20% or so for eight years. While this margin is fluctuates a little, it is reasonably consistent.
ROE: The Company has had reasonably stable ROE behavior for the past five years. Something appears to have happened from 1996 through 1999, which will be investigated later.
Pass or Fail? The company passes an initial screen. At first blush it appears to be a quality company and should be investigated further.
Let’s keep on going.
Competitive Landscape
Before starting on the analysis of a company such as Sonic, it’s good to take a look at the competitive landscape. You can tear sheets (S&P) or Value Line reports from any decent broker or public library. These resources are good for identifying where a company exists—where in a competitive environment. There are various ways of describing this environment. The SIC (a statistical classification standard) is used by the Federal government to describe various parts of the economy. Companies with the same SIC code are regarded as being comparable in some way. The SIC for Sonic is 5812. One can more broadly look at the sector (09 – Services) and the industry (0942 – restaurants) and determine which other companies lie in this space.
When you screen a database of public companies having the same primary SIC code as Sonic, you come up with over 100 competitors. The first challenge begins: what exactly is a competitor? That’s a tougher question to answer than you might think. The government has one way of looking at it; Wall Street may have another. For me, the simplest way to think of it is from the perspective of the customer. If a person walks into Sonic to spend money, what were his or her other choices before deciding to enter that restaurant? That’s the big question.
Generally speaking, Sonic is a ‘burger joint.’ It seems reasonable that people visit Sonic because they’re hungry. They probably don’t decide between Sonic and Starbucks: some might, but most probably do not. Is a company like Domino’s Pizza (also SIC 5812) really a fully-fledged competitor of Sonic. Does the average consumer have the same decision making process when deciding between these two options? Probably not. In fact, as you think about it a little more, you can start to narrow down the list of 100 restaurants in to those that compete directly with Sonic (Checkers Drive-In Restaurants—CHKR) and those that do not (Meritage Hospitality Group—MHG). Competitors vie for the same dollars, which implies that must access the same consumers.
Identifying competitors is important, because we’re not simply interested in buying a company; we’re interested in buying a good company. No matter how good an SSG may look, if there is a competitor that looks better, we need to know about it. In fact, right from the get-go, it’s important not to think of the SSG in isolation....[Message truncated] | 
