Pep Boys: One Man's Loss Is Another Man's Gain

| About: Pep Boys (PBY)

Private equity firm The Gores Group walked away from its $15 a share cash bid to acquire iconic auto parts chain Pep Boys Manny Moe & Jack (NYSE:PBY). It must been something quite horrific for it to end up with a $50-million hole in its pocket as a penalty consequence - for disappearing at the altar. As far as Pep Boys is concerned, it just cashed in on a lottery ticket equating to nearly $1 per share of "free money" for shareholders (which is already slated to pay down debt).

The market has been treating PBY as a leper with its 40% drubbing since the deal starting unraveling, which is not warranted. Besides, people will still need tires and brakes for their cars. Now that PBY's market cap has been decimated (it touched a three-year low), many previous interested parties might just start thinking "acquisition" again.

The fundamentals: The auto parts purveyor is still real estate rich, as it owns 232 locations out of the 738 stores it operates. It also retains ownership stakes in its headquarters building, four distribution warehouses averaging 400,000sf each and two regional offices. It is now selling at a discount to book, pays a 1.3% dividend, and possesses a multiple of ten times fiscal 2013 estimates of .89 cents. Contrast that with the big boys in the sector, which all have higher multiples, only sell parts (PBY also provides the labor to install), and do not pay cash dividends.

PBY's share price to sales ratio is a mere .21 ($8.90 share price/$41.69 in sales per share). Compare that to AutoZone (NYSE:AZO) at 1.71, Advanced Auto Parts (NYSE:AAP) at .87, and O'Reilly Automotive (NASDAQ:ORLY) at 2.06 and it is obvious that if PBY has ample opportunity to fix things operationally, ultimately improving well below industry margins.

The bottom line: The shares are due for at least a dead cat bounce, as shorts scurry to " buy to cover" in order to ring the cash register. Add the prospect of bargain hunters swarming in, who can't pass up the opportunity for a good old fashioned "half off sale" and you have the recipe for a decent rally.

Next week's second quarter earnings report might even provide some color and guidance that just may reveal things are not as bad as perceived and the stock's carnage was somewhat of an overreaction. I think it might be an appropriate time to buy when others are fearful. Will Gore's loss be your gain?

Disclosure: I am long PBY.

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