Pep Boys Needs to Show What It's Made Of!

Gail is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Pep Boys – Manny, Moe & Jack (NYSE: PBY) is getting ready to release its third quarter earnings early next week.  Its earnings over the past few quarters have been all over the map.  EPS have been up 13% one quarter and down 50% the next.  This quarter, I’m really looking for some stability. 

Overall:

In reading the Pep Boys prior 10Ks and 10Qs, I find them to be a thoughtful company, seemingly aware of the risks they face.  A cursory look at @PepBoysAuto on Twitter finds mostly positive posts.  This is a company that’s been around since 1921 and has learned how to roll with the punches.   

I am concerned with the format they use for their 10Q Summary however.  Revenue and expense numbers are all buried in the text.  The only numbers neatly laid out in an easy-to-read chart seemed to be percentages.  That does make me wonder what they might be hiding.

What I’m looking for:

Here are some things I’ll be looking for when Pep Boys releases its quarterly report on Monday.

  • Recognition of the impact of the overall decrease in miles driven in the US on their long term results, and what plans will be put in place to counter that.  Pep Boys will continue to be affected by certain economic issues out of its control.  For example, as gas prices continue to rise, miles driven within the US will continue to decline.  This latest chart from the DOT’s Federal Highway Commission shows miles driven down 3% off a peak reached in November 2007.  Less miles driven mean longer periods between vehicle maintenance. 
  • In January of this year, Pep Boys committed to opening 75 new Service & Tire Centers and 10 new Supercenters.  In the second quarter they scaled that back to 30 and 10.  I’ll look for a total of 190 Service & Tire Centers and 567 Supercenters operating at the end of the third quarter.  (The second quarter 10Q reported 173 and 562.)
  • I’ll look for a modest 1% increase in Revenue, and a gross profit margin around 24.5%. 
  • I’m concerned that Administrative costs have been trending upwards.  SG&A higher than 22% as a percent of total income will serve as a big red flag for me.  I’m hoping that the SG&A numbers will come in under 21.5% of total income, compared to 22.2% and 21.7% in the first and second quarters of this year.  (In comparison, SG&A for the last fiscal year was 21.5%.)

Ratios:

Looking right now at some of Pep Boy’s ratios, its PEG ratio is 1.6, indicating an overvalued stock.  One of its competitors, O’Reilly Automotive (NASDAQ: ORLY), has a PEG of 1.18, which is more reasonable.  (I like to see a PEG in the range of 0.75 to 1.05.)  Pep Boy’s Quick Ratio of 0.23 is also a warning sign to me.  I like to see the Quick Ratio at or above 0.75. 

Return on Equity is low at 7% compared to 22% for O’Reilly and 40% for Advance Auto Parts (NYSE: AAP).  Profit Margin for its most recent quarter is around 6% compared to 10% for O’Reilly, 8% for the Auto Parts Industry as a whole, and almost 12% for Auto Zone (NYSE: AZO).  That said, I’m concerned that 6% is not a true view of Pep Boy’s Profit Margin.  This percentage includes proceeds from the merger terminated during the second quarter.  A more reasonable Profit Margin for Pep Boys is probably around 1.5%, well below the Industry average.

Bottom Line:

Based on its steady yoy 1% increase in revenue per quarter, I’m estimating income of $527 million and net income around $5.3 million.  I think Earnings per share will come in around $0.16 and I’m projecting a stock price around $11 early in 2013.  Given these projections, I have no plans to purchase Pep Boys until its fundamentals significantly improve.


GailPEddy has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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