Shares of Sonic Corp. dropped Monday after a Morgan Stanley analyst cut his rating on the shares, saying competition and a new emphasis on value promotions are hurting margins.
The stock sank $1.57, or 13.1 percent, to $10.22 in midday trading.
Analyst John Glass downgraded the drive-in restaurant chain to "Underweight" from "Equal Weight" and set a price target of $8, implying he expects the stock to drop 33 percent from Friday's closing price of $11.99 in the next 12 months.
Glass said pressure is increasing on Sonic from the burger fast-food chains as they attempt to offer lower prices and "encroach on Sonic's highest margin business of drinks and desserts."
McDonald's Corp. has been aggressively expanding its drinks platform, adding espresso-based coffee drinks in all of its U.S. locations. Once that rollout is complete later this year, the company plans to add smoothies and other drinks to its restaurants.
The analyst also noted that Sonic's new $1 menu may squeeze its margins and lower profit.
"Sonic's margins, both at the restaurant and at the corporate level, are likely to be permanently impaired from actions the company is taking to drive sales, in our view," he said. "From a longer-term perspective, the elements of Sonic's investor appeal — unit growth, high margins, and unique offering — may be at risk of never fully recovering."