Sonic Automotive Reports 2Q Earnings

people do. And machines here Bloomberg. You know, I like to wake up in the morning with a big inch V eight. Let's talk about cars for a minute. Jeff Dyke joins us. He's a president of Sonic Automotive and UM, they had their uh Q two results out all time record quarterly revenue three point four billion dollars, up fifty eight point seven percent year over year. If that doesn't reb your engine, I don't know what does, Jeff. What's the what's the biggest problem? Is it getting inventory in

the door? Yeah, so from a new car perspective, that's the big issue. UM, We've got eighty four stores across the country, and we've got about an eight to nine days supply new car inventory pre COVID, we that number would be in the fifty to sixty day range. So uh, certainly inventories are tight. That's push inflation up on the

new car prices. Um. And it's also affecting used car business because you know, new car inventory drives used car inventory, and so you've seen this crazy and version of used car prices being really really high wholesale prices at some point in time during the summer, we're paying more uh for a for a car than we could you know that we could sell a new car for uh. So uh, it's just created all kinds of crazy pricing. But that's gonna alleviate. UM. The chip shortages is you know, I

wouldn't say coming to an end, but certainly getting better. Um. And so between now and the year, inventory levels are gonna come back on new uh and PreO pre owned inventories will come back, and so we're looking for a great second half of the year. All right, Jeff, Hey, before we start, just give Bruton and Bill Brooks my best regards. I worked with those guys when taking that Speedway Motorsports Public Way back in the day. So some good times with those guys. I'll be happy to do

that too. Fantastic guys. Yep, Jeff talked to us, you know, so the automakers, it's it's just amazing you talk to me about that inventory. And and the guy got a buddy who's who, who also is an auto business, and he says the exact same thing. I mean, when are the O E M s telling you that you can get back to a more normalized level of inventory. Yes, so I think it's gonna happen in stages. I think

the highline bludgury vehicles come back first. So we have an eight day supply of BMWs and our TBMW stores across the country today, um probably October November time range. That's gonna be to thirty. I don't expect inventories to ever come back to the level that they were pre COVID, though, because it's a heck of a lot easier to manage smaller inventories. The manufacturers are not having to spend a ton of money on incentives any longer, so they're making

more money. The business is just a lot more EFFICI and so what may have been a sixty to seventy days supply traditionally before COVID, I think will end up being a forty five or fifty days supply as we move forward, but certainly not the lows that we're seeing here at the end of July in August, in the eight and nine to ten day range across the country. That that's going to get better progressively as we move towards the end of the year. So first, I have

an observation which just dawned on me. Uh, the four bosses that I've spoken to since I've been in New York all drive BMW's, And then I know, and then Paul does to Jeff and and Paul is he's facing a conundrum here because he needs he wants to get a new car, waants a stick with a Beamer because he likes to drive, and he wants to stick shift. What can he do? Called Jeff dyke Ye, but but but manual transmissions are difficult to get these days, aren't

they They are? But we certainly can make that happen. And and um, you know, there there's that option for all of their model lines, um in particularly supporting or of the luxury model lines. And so that's easy to do. We we can certainly make that happen. And sounds like a lot of as well. You got three M three or an M four I'd saying, which, so you can

handle that very easily. So Jeff, it's interesting. I mean for you at the dealer level, these are you know, good times because you really can drive hard bargains, right. I mean, it's definitely a seller's market, isn't it. Everything is selling an M s r P. I don't care if that's a twilet camera or Honda a chord which never does that all the way up the line. Um, everything is selling an ms RP. People have to have cars. We don't have to discount the manufacturers aren't discounting, so

there's really no discounts out there to give. Um. And and I think as we move forward it lightens up a little bit. But again, um, I think we'll be selling closer to M s RP than as far away from M s r P as we were selling prior to COVID had really kind of gotten a way of the world. It's the first thing you learn in economics, right is supply and demands. And um, they're going to control the supply a whole lot better than manufacturers are. Um.

As we move forward, which is a huge blessing for everybody. Well, how long does does the demand hold up? I mean, I know a lot of you know, kids that said they were never going to get cars, city dwellers that maybe thought they didn't need them, and they all have gone out and bought automobiles. But you know that can't last. Well, I don't think it can last. But short supply does create demand. Um, that's just how our country works, right.

And so when anything, remember toilet paper last year. Luxury cars with the toilet paper this year, right, Um, you couldn't you couldn't buy a roll of toilet paper last year to save your life, and you did. It was fifteen bucks. Um. And and that's what's going on in the car industry this year. I think it. I mean, it's certainly going to get better, um, you know as we move forward, But the government's got a quit paying everybody, um and to stay home. I mean the labor market.

You feel it. In the labor market, we certainly do. The manufacturers certainly do. And I think as people get back to work, the demand you know, comes down a bit. But I don't see that happening this year and may not even to the first six months of next year. That the demand is just so high. We've sold all the cars on our law everything in our pipeline and have customers. They're still coming, and so the business is

just amazing at this point in time. I've been in the business for twenty five years and I have never seen it like this. Wow. Interesting, alright, really interesting, Jeff,

thanks so much for joining us. Really appreciate it. Jeff Dykes, President Sonic Automotive UH symbol s a H. The stock is up about three quarters of one percent today, up thirty nine percent for the year, and they posted some really strong results last night and the business, as Jeff said, UH, stronger than ever under ninety four billion with a B. That's some serious What would you do just tax problems and who needs that issue there? What a lot of

folks are trying to do in the market places? Um, you know, think about do I plow back into those growth stocks which have been such good stories over the last decade plus, or do I stick with my rotation trade, the reopening trade. Our next guest has an opinion there, Mike Lucas principle and CEO of True Mark Investments, Mike, I seem to recall that you are certainly in that growth stock camp. Give us your thoughts. Definitely in the

growth stock camp. I mean, look, the reality is we've we've pigeonholed a couple of different trends rightly, right, the work from home trade and the the Great rotation. I think both are dead right, and if if we waited ten years, so the Great rotation of value that was purely model driven and kind of floated for a bit there, and now we're seeing it dissipate. The work from home trade. It's funny everyone punished some of the secular growth stocks

when the the lockdown started to end. But reality is, when you see earnings results come through those secular growth stocks that are part of the broader digitalization, the global economy continued. Yeah, they're showing acceleration, and Amazon's getting beat up, right, So maybe we're looking at the wrong trade for the work from home trade. So it's you know, I think there's a there's a nice pocket of secular growth out

there that's going to continue to accelerate. It it was accelerating prior to the lockdown in the pandemic, accelerating through it, and now it's accelerating out of it. And sometimes it takes one too even three yearning cycles to separate the you know, the story stocks from the real secular growth stocks. But they're there and there, they've got tail winds, and you know, regardless of what the macroeconomic environment is, these

are industries and companies that aren't going away. But Mike, are you saying, you know, you don't believe in value rising up over growth or that we're just framing it the wrong way in terms of what these stocks, what these companies are, Well, I think we're framing it the wrong way. First and foremost, we're looking at it as a binary outcome. Uh do I think value is going to rise up over growth? No? I don't. Long term, I don't. I think this whole thing is now geared

towards growth. You know, if we look at the last ten years, quite frankly, most of the growth was concentrated and saying, you know, if we take that out of the equation, really what happened there? But if you if you look at a holistic view of this and understand that we've got right now, I mean essentially to really strong wealth creators in this in this country and globally real estate and equities. So you know, how long is that value trading to last. I think you see great

opportunities in value and some different end producers. You see tremendous opportunities and secular growth. It doesn't have to be binary. So you know, when we talk about work from home, we talked about great rotation, we're falling into that track. You know, we're falling into the idea that it has to be one or the other. It's not. It's it's

never been that way. It's always been sort of what's going on in the gray area, and that will continue because as we can see like reopening or we're not reopening, or the masks you guys earlier mask mandates are recommendations, you know, the nuances in the language or throwing people into a tail spin right now and we don't know what's going to happen in the next week, the next month.

And we saw inflation signals go off the chart. Now their team again, volatilities down, and the market that you know, the equity market keeps grinding higher, and uh so you know, I wouldn't call it uncertainty but I'd call it confusion right now. And you know, I'd think the best thing to do is look for stocks that maybe a part of the or beneficiaries of the new paradigm shift. Where there are secular growth stocks, particularly intact that I've become,

we'll we'll call them defensive for lack of a better term. Uh. When we've all been running around staring at work from home and thinking about the great rotation, and it's time to shift off thinking a little bit, Mike, what do you think about inflation has certainly been a worry concern from market participants. How do you think about it with

your UH strategies? Well, you know, inflation t here. You know, anybody's gone to the gas pump, or or gone to the grocery store, or I guess less six weeks tried to get lumber, you know, as realized get inflations definitely here, that was a transitory I guess that's that's the real question.

The FED handling it correctly, that's a whole another question. Um. So in the end for us, I'll I'll parent poward marks here and say that it's quite possible the best inflation hedge out there is is a strong secular growth story. And even if we do see yields start to creep up, we're still in a historically low yield environment. Even if we get back to pre pandemic levels. Uh, if inflations doubling that up, where do you go? Right? And so you know, I think the need for growth in in

the equity space is still going to persist. And I think inflations here, it's just a matter of how long it's gonna last. And what I'm not the set is tackling it correctly well, as long as it's less than growth, right, I mean substantially less. I heard the term growth growth flation the other day and I thought it made perfect sense. Yeah, No, I think that's I think it's a great way to

coin it. Um. The reality is that again, if we can if we can absorb inflation, uh, then you know people are going to co exist with it, right, Not that we have a choice anyway, but I think the ability to account for inflation with different asset classes is really going to dictate how this is digested, you know, in the in the markets and in particularly on main street. Mike, thanks so much for joining us. Great to get your insight today. Mike, Lucas is principal and CEO at Truemark Investments,

x On Mobile, Chevron. They reported earnings today and I think about this big energy names. I think about you know, big oil rigs in the middle of West Texas and out in the North Sea. But folks are increasingly thinking about sustainable investing and just across the board, not just on these energy companies. Let's dig into that a little bit. Carrie Dugan, advisor for Rock Creek, also a former deputy policy director to then Vice President Biden and White House

Climate Energy advisor. Carrie, give us a sense for it's seems like these big energy companies, at least the US ones, are making efforts at becoming more sustainable in their operations. Give us your view. Well, first, thanks for having me on, Paul and Matt. It's it's a real treat to be on with you today. I heard what you open there with, and if you if you read a little bit closer, you guys are going to notice that in addition to that their earnings, they're also reporting on their investment in

the low carbon solution space. And and lately I've heard a lot of talk one of my favorite perhaps it's because I'm from Michigan and cold cold weather states. You hear a lot of people talking about ice hockey, and I was listening to both Secretary Granham as well as they and the steer talking about skating to where the puck is going. So I think that, you know, we could observe that with the oil and gas companies, they they kind of see the future. They're tracking what's happening

in Washington with a new by partisan fielding. They know what's coming. So I think it's a really exciting time on top of a really uh let's call it scary time. You've got record heat and you also have record investments in this space. Um in terms of you know, the oil companies, can they ever be sustainable or it always strikes me as odd when um, when you know green investors go into big oil. But on the other hand, we have seen them now infiltrate in terms of activists

on the board. That was another big, big moment, let's just call it that. But let me point you guys

back to last week. I was at in Washington, my first pandemic trip, I might add, for a summit that we put together at Rock Creek with Asani Beschloss and about twenty global leaders in this space, and um, you know, maybe if you take nothing away from that h series of really important interviews, um Asani sat down with Brett Harris, whose president CEO of the University of Texas, Texas A and M University investment management company, and he was talking

about how the the you know, previous era was a hydrocarbon era and this era that we're in now is moving away from hydrocarbons into more renewable, sustainable sources. I don't know about you, but that message coming out of UH, you know, a huge UH an importantly placed investment management company, was a big signal to me. And I think that's really um that's that was a huge takeaway. And you know, there's all sorts of interesting other nuggets that came out

of the summit. I mean, we had Gina McCarthy, who is in a really important role right now talking about following these investments that you're talking about, and and you know the role of government and buying down the risk um and the down payment that this new biprice and plan is going to be really means that the investment investment community in your audience has a big huge role to play going forward. How about the role of government.

I'm thinking about President Biden's infrastructure bill, climate commitments. Give us your thoughts as to where this administration is going. Yeah, I mean you you mentioned in your lovely introduction that I've had some history here, UM, and so I do know that because I worked very close to with the President when who was vice president. You know, these these issues around jobs and equity, UM and climate are near

and jured to his heart. And I think you see that re selected in UM, both the person and in the policy. UM. Back back then we were working on the Recovery Act and we called that a down payment and clean energy future. And now we're working on a bipartisan infrastructure bill. I mean, there's just been a huge shift in the landscape. Uh, that sort of thing. One thing too, is definitely what's going on in real time, the real impacts that we're all seeing with our own eyes, UM,

from Germany to China. I'm here in Detroit, guys. I mean, we're experiencing this in real time. So I think the policy has met the moment um and the investment community. You know, there's there's trends now, there's more money in this space. You're seeing new and big, huge funds in this space and climate, which is exciting. But you know these investments aren't limited to climate when of what needs

to happen. There's other issues, of course that I view as quality of life issues, and so does the President. Um when you think about food scarcity and and other mitigation issues, air quality issues. UM. So I'm excited by what's going on in Washington, but I also know that it's it's just it's another down payment and there's a real role for the investment community to come in. Yeah, and the investment community where I want to go. Now you're advising Rock Creek, and people want to make returns

on investments. It's not just about all truism, um are They are investors willing to accept lower returns if they can do good. Um. I'm not going to even go down that road. I'm going to talk to you about what I know from working as an advisor to Rock Creek. Gapstane. You know she's came. You know, she's probably been on your show and you'll have her back. Uh. You know,

this is a former Treasure of the World Banks. So she's been doing in my view, E. S. G. And d E. I started to use acronyms, but I know your audience knows them well. Uh investing before in fashion and now it's very much in fashion, and she's been doing it with returns for our clients, including major foundations and pensions fun So there's there is proof there, and I think, UM, what's what's more telling right now is you know the appetite for the data to support that.

I know that you all have talked about this on the show. If something, we're without playing all my cards today, Paul and Matt, I'll just tell you that we're going to come back and talk again about the data that UM Rock Creek is UM has at its fingertips and in ways that we can UM make that more readily available so that investors can actually see these returns. So I think that UM premise that you mentioned your question is packed tense. I think the investments are here and now.

So Sarah, give us a sense here, I mean E s G investing. I first heard about it maybe fifteen years ago from European institutional investors, but now more and more here in the US. Where are we in terms of really embracing it? Would you say, well, I think there's there's interesting in creating of a new um opportunities.

We had on the summit last week. He had the founder of appeal ape l, which is a company that uses uh, you know what I was just called generally new technology to make you know, your fruits and vegetables last longer. And that's really important, as I mentioned in terms of like food scarcity. But the what's interesting to me about that as an investment is they consider nature as the end user, not sort of a human as

the end user. And so in in my world, you know, I come out of the sort of energy, environment, science and tech. You know, we call that life cycle analysis, and they think I think that's an interesting trend. I think that's one that there's a real appetite particularly along uh millennials, millennial age investors are looking for that type of information and and uh you know these closed loops, I think UM watching uh Andrew Spires ted talk the

other day and I thought it was so interesting. He talked about going from a take make waste economy to a circular economy, and I think that that is the trend that in the investors need to be watching the more right now as a more circular opportunity. Carry, Thanks so much. Carry Dougan there, she's an adviser to Rock Creek, former deputy policy director for then Vice President Biden. This is Bloomberg Amazon. Notwithstanding, we're getting some really really good

earnings this quarter. Um, and that's alleviating concerns from some investors are worried about market valuations. Let's check in with one of those market participants, Phil Orlando, chief equity market strategists ahead of the Client portfolio Management at Federated at Hermes. Uh. These guys are big. I mean it's like six hundred billion dollars assets under management worldwide. Uh, so they have more than their toe dipped into this investment pool. Phil,

thanks so much for for joining us here. Give us your thirty thousand foot view of this earnings cycle and and maybe more importantly, the outlot we're getting from some of some in corporate America. Well IT awards. The earning season has been terrific. You know, we're roughly two thirds of the way through SMP five. Earnings are double what they were a year ago. Uh. The revenues are very strong.

Earnings are very strong. I think that the most important story are the splits that the growth companies, the technology names are doing fine. Earnings are up fifty to sixty percent year on year, but the really outsize gains are coming from the economically sensitive categories like financials, industrials, consumer

discretionary energy. That those numbers are cartoon like. They're up you know, two three four percent year on year um because remember those companies, you know, we basically shut down and left for dad a year ago second quarter. Uh So the numbers, you know, are strong. As we've come back to life. We now know that the recession ended in April of last year, based upon the National Bureau

of Economic Research making that announcement last week. So we're getting terrific news out of earnings and the guidance I think has been constructed. Companies are saying they've got better visibility. Obviously there's some uncertainty in terms of fiscal and monetary policy and where are we at the delta variant, But but I think we're in a lot better shape today than we were a year ago at this time. Do

you think those two things? I mean, David Couston was on a couple of weeks ago from Goldman Sax has had his worries are about rates and about tax policy, but the delta variant hadn't reared its ugly head, uh, you know, to this extent at that point, are those the biggest headwinds? I think absolutely. Um. You know, David's a smart guy. He was spot on with his concerns about fiscal and monetary policy. A month later, the delta variant, um, you know, is now accounting for something like eight or

eighty five percent of all new infections. If you're vaccinated, you're you're in pretty good shape. But the reality is that there are parts of the country, mostly in the Southeast, where the vaccination rates are not where they should be. You know, we're probably or so here in the New York area. We're probably half that down in Mississippi, Alabama, Georgia, et cetera. So I think we've got to do a

better job of getting those folks vaccinated. It up to speed, because the you know, what the doctors are telling us is that that you're vaccinated, you're you're not going to die from the delta variant, and and that's the objective that we're trying to achieve. Try to stay alive here, all right, Phil, We've we've got this delta variant. It's kind of maybe causing some folks to rethink the reopening trade as opposed to maybe focusing on some of the

core growth stories, some of the tech names. Where are you guys focusing on right now in terms of sectors. So, um, there's absolutely been a resurgence in in the growth and the technology names since let's say Memorial Day. So over the course of the last couple of months, growth and tech has done better. UM. But because we are producing these these outsized earnings games in uh in the cyclicals uh and and those stocks have underperformed the growth in

tech names over the last couple of months. That's where we're placing our bet. Um. We believe that we will get through this delta variant uh and and the reopening trade is as we get into the fall, the last you know, three months of the year or so, uh, we're going to get that rotation back into value. UH. So, what we'd be doing is taking a look at at those companies that are that are doing great, that are getting good guidance, the earnings and revenue numbers are strong,

perhaps they've underperformed from a relative valuation standpoint. That's where we think is the outsized opportunity is going to be to end the year. Are you concerned at all that we may have that we may hit a fiscal cliff? Um? You know, if we don't pass the bigger of the legislation that the Democrats want to cram through, are we gonna you know, fall off in terms of spending. I'm

very concerned about the fiscal cliff. If you've been reading any of my weekly market commentaries over the last I don't know, three or four weeks, uh that the the the debt feeling expires tomorrow. UM. I believe Treasury Secretary Yellen has enough money to in the couch cushions to keep things solvent into about October and November. But we're

gonna have to address that issue. And I suspect it's going to be an issue that that Congress will work into either this one point two trillion dollar infrastructure plan or this you know, three or four or five trillion dollar UH social spending plan that that seems to be more along party lines. But somewhere within one or both of those packages, we're going to have to address the deficit ceiling and and uh, you know, and and and

and lifted. Phil thanks so much for joining us. Philo Orlando, their chief equity market strategist and head of client portfolio management over Federated Hermon's. They've got eighty billion dollars in equity. He's got firm wide six billion dollars of assets under management. This is Bloomberg. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts

or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller, three pt on Fall Sweeney. I'm on Twitter at pt Sweeney Before the podcast. You can always catch us worldwide at Bloomberg Radio