Pep Boys: Insanity Dominates the Share Price

| About: Pep Boys (PBY)

Pep Boys (NYSE:PBY) has never traded as low as its current share price of $3.25 since it became a public company in the mid-seventies.

At a current market cap of $169 million, PBY's 562 locations average a paltry $300,000 each, after dividing the market cap by the store count. This is absolutely absurd, as the cost of fixtures, signage and computers for an average stand alone location nearly add up to this amount by itself. Wall Street seems to be forgetting about the 235 locations where the auto parts dealer owns both the land and buildings. The company also owns the real estate on its 300,000 square foot headquarters location and three distribution centers exceeding more than one million square feet. The estimated market value of PBY's real estate holdings is near the $1 billion mark.

PBY's inventory is recorded on the balance sheet at $561 million. It is absurd that the market is giving PBY no valuation for any of its other assets. I assume the "street" is expecting the worst case scenario in relation to PBY's turnaround efforts, a total failure, because that's exactly how it is pricing it at this juncture. The fact is, PBY's liquidity is fine and the company is not burning through its cash, as the company had positive cash flow in its last quarter of  more than $40 million.

Analysts are still bullish: Kevin Dann upgraded its opinion last Thursday from neutral to buy while S&P provided research notes claiming the shares are selling below liquidation value and placed a $9 price target.

Hard economic times benefit auto part retailers. It is common knowledge that during difficult economic periods, consumers defer purchasing new cars, requiring them to keep up with the maintenance requirements of their older cars. The rapid decline in gasoline should promote more miles driven, creating more wear and tear. The repair of one's vehicle is necessary and is non-discretionary. You can defer new floor mats and polished rims, but there is no way around satisfying the need for tires, brakes and oil changes.

Egg on my face: I promoted the shares heavily in my last piece on Sept 15th and since then the shares have seen an additional 60% of their value vanish. If I liked the shares at $7, you would think I would absolutely love them at $3.25!  

Do I recommend buying now?  Probably not, because conventional wisdom claims not to throw good money after bad. I am flabbergasted on the degree of destruction of the share price and see no reason for as much carnage as the stock suffered. The share meltdown was the result more of  panic selling from forced fund liquidations rather than a deterioration of fundamentals.

Bottom Line: PBY's current 29 cent cash dividend yields a whopping 8%. If the company was in as much trouble as the Street appears to be claiming, the cash dividend would have been eliminated by now. The fact that it has been maintained is a good sign that PBY is in much better shape than its current market perception. I would be a buyer of more shares, once the stock begins to gain strength, and rallies above the $4 mark. It is certainly a more expensive way to buy, but it is also much safer as you are paying a premium to have the trend going in the right direction. Warren Buffett's approach to be "greedy when others are fearful and fearful when others are greedy" makes perfect sense, it is just easier said than done.

Disclosure: Long.