This week, automotive repair and maintenance company Pep Boys Manny Moe & Jack (PBY: Charts, News, Offers) beat the earnings by a comfortable margin, but missed on revenue. However, the numbers were strong enough to suggest that the company has been weathering the economic downturn well. The future of Pep Boys was previously questioned by many investors, who believed that the company would be highly subject to the weakening consumer environment, which has decimated automaker stocks, such as General Motors (GM: Charts, News, Offers) an Ford (F: Charts, News, Offers), across the market. Aftermarket retailers and service providers such as Pep Boys, Autozone (AZO: Charts, News, Offers), Advance Auto Parts (AAP: Charts, News, Offers) and O’Reilly Automotive (ORLY: Charts, News, Offers) are all being watched closely by market watchers, who are looking for hints on the health of the auto industry in general. Pep Boys will also benefit from a recessionary environment, in which consumers hold out on purchasing new cars in favor of repairs and maintenance.
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The company posted earnings of 26 cents per share, or $10.6 million, on revenue of $522.6 million. Earnings per share increased 31.6% and revenue rose 3.5% from the prior year quarter. EPS beat the Street expectations of 19 cents per share, but revenue came in short of the expected $528.4 million. This marks the third straight quarter that net income has risen, and the fourth straight quarter that revenue has risen. Pep Boys has been in operation since 1921, and currently operates over 7,000 service bays in more than 700 stores in 35 states and Puerto Rico.
Pep Boys CEO Mike Odell stated, “Our maintenance and repair services remain stable, allowing us to mostly offset soft tire sales.” Tire sales account for approximately 17% of the company’s revenue. Meanwhile, repair services and auto parts account for 20% and 83%, respectively. Odell assured investors that tire sales would inevitably bounce back, due to the physical necessity of tire changes. “Our experience has taught us that customers can only defer their tire purchases for so long,” Odell stated, “so we have continued our aggressive surround sound’ promotional activity to ensure that Pep Boys remains top of mind for tire customers.” The surround sound’ media campaign is an advertising blitz focused on television, radio and direct mail advertising, which emphasizes the company’s “Does everything for less” slogan and mantra. Odell firmly believes that the increased advertising was responsible for the company’s turnaround in fiscal 2010.
In addition, Pep Boys acquired Big 10 Tires and Automotive for $41 million in May. Odell reports that the 85 Big 10 stores are now all earnings accretive. In addition, its organic Service & Tire Center sales are increasing along a “three-year maturity curve.” As they achieve this maturity, they will also begin to contribute to earnings,” stated Odell. Odell also reported that the company “amended and restated” its line of revolving credit in order to reduce its interest rate by 75 basis points and to extend its maturity to July 2016. The result should be a stronger operating cash flow through its vendor payables leverage, which will give it more capital to pursue growth.
All major analysts currently have price targets far above the company’s current $9-$10 per share, which trades at a mere 10 times forward earnings with a PEG ratio of 0.91. Argus analysts lowered their price target from $17 to $13 while maintaining a “buy” rating. Stifel Nicolaus analysts maintain their price target of $17 with a “buy” rating. Shares are currently trading below both its 50-day moving average of $10.12 as well as its 200-day moving average of $12.06.
Other News About PBY
Pep Boys Q2 profit rises 31 percent
Pep Boys impresses with a solid earnings beat.
Pep Boys gets more repair work, fewer tire sales
Pep Boys business segments counter-balance each other in times of economic uncertainty.
Other Stocks in the News
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McDonald’s pumps $1 billion into renovating its Canadian stores.
Baidu, Dell Team Up on Phones, Tablets
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
