Pep Boys' (PBY) first quarter earnings were disappointing, but not disappointing enough to lop 20% off its market cap. Mr. Market’s typical “sell first and ask questions later” was an obvious overreaction. The company's first quarter results delivered flat earnings, stemming from a huge increase in the cost of gasoline - nothing the company had any control over (customers are driving less miles and have less money to spend).
Looking at the report deeper, there are some bright spots. Sales rose $3.5 million to $513.5 million, SG&A costs fell 60 basis points from 21.80% to 21.20% and interest expense dropped. But these positives were not enough to offset its gross profit margin deterioration of 70 basis points from 27% to 26.3%.
Liquidity is good: PBY has $50 million in cash and is undrawn on it credit revolver ($153 million line), so it has the resources to continue its Service and Tire Center acquisition plans. Its long term debt of only $295 million is manageable, and contains no scheduled principal payments in the near term. The company has been on a buying spree lately, and so far has purchased 147 Service and Tire centers, including 85 locations in last month’s Big 10 Tire Centers purchase. Once these acquisitions take hold, they will be earnings accretive. The company plans to acquire another 55 service locations by the close of the fiscal year.
Real estate rich: The company recently had its real estate portfolio appraised (consisting of 232 stores, where it owns both the land and buildings) at $690 million and this does not include its four distributions centers or headquarters facility. Manny, Moe and Jack’s real estate value already exceeds its market cap by more than $100 million, so it’s safe to say its share price has a floor to it, and we are probably very close to it, besides at these levels, the company again makes sense as an acquisition target.
Bottom line: The shares are way oversold, and ready for at least a dead cat bounce, (back to $12) as fuel for the rally should originate from shorts buying to book their profits and bargain hunter bidding. The shares have been extremely volatile, selling off last March to the mid ten’s, only to rapidly run up nearly 40% before the recent bloodletting. Black Rock Advisors seems interested in PBY’s potential, as it recently doubled its position to 7.7% and just might consider it a real value play, at a multiple of only 13 times forward earnings of 87 cents, 1.2 times book value and a 1% cash dividend yield.
Disclosure: I am long PBY.