This Automotive Retailer Looks Attractive

The automotive retail sector has been performing well despite difficult economic conditions. With impressive quarterly numbers and strategic expansion plans, one company in the sector, Pep Boys (NYSE: PBY  ) , has caught my eye.

The potential of the automotive aftermarket sector, coupled with an aggressive growth strategy, makes Pep Boys a valuable candidate for outperformance in the future. It's worth our time to evaluate the stock more closely to see if there's a valuable stock up for sale.

Nuts and bolts
Pep Boys' net income surged 31%, while revenue increased just 3.5% from a year ago.

The primary reason for the disparity was a difference in the income tax expense reported for the quarter. The company used a benefit of $3.4 million relating to a state tax valuation allowance to reduce its tax expense for the quarter. This allowance helped the company lower its effective tax rate to 13.5% in the second quarter, from 39.4%.

Pep Boys was also able to maintain a decent gross margin of 26% for the recently concluded quarter. A majority of its earnings came through merchandise sales, while the rest came from services revenue, which comprises labor charges for installation of merchandise and repairing vehicles. Tire sales took a back seat at Pep Boys as sales mostly came from Big 10 stores. The acquisition of Big 10 helped the company report a decent revenue figure.

The Philadelphia-based automotive retailer has been maintaining a decent operating margin while operating income grew at 13.9% per year over the past two years for the second quarter. Earnings have surged over the past two years at an annual rate of 38%, mainly due to an increase in revenue, and the recent tax benefits used by the company.

Pep Boys believes in growing through extensive acquisition. This growth strategy is facilitated through its strong financial position. Pep Boys has a decent debt-equity ratio, which stands at 61.6% for the just-concluded quarter. The interest coverage ratio has also improved to 3.1 times coverage, which shows the company is decently placed when it comes to interest payments. Despite making acquisitions to the tune of $41 million, it has not used debt; all the transactions have used cash on hand. This goes to show that Pep Boys has great liquidity. Pep Boys ended the second quarter with a cash balance of $62.0 million.

How cheap is it?
The company looks quite cheap when compared to its peers.

Company

Trailing Price-to-Earnings Ratio

Forward Price-to-Earnings Ratio

Price-to-Book Ratio

Pep Boys 14.5 12.8 1.3
AutoZone (NYSE: AZO  ) 16.8 12.6 NM
Advance Auto Parts (NYSE: AAP  ) 15.0 12.4 6.4
Genuine Parts (NYSE: GPC  ) 16.5 14.7 3.0
O'Reilly Automotive (Nasdaq: ORLY  ) 22.1 17.8 3.5

Source: S&P Capital IQ.

On a P/E basis, the company is the cheapest of its peers, trading at 14.5 times. Its lower forward P/E suggests that the growth factor may not be fully factored in yet. Looking at the P/B ratio, the company appears to be trading cheaply.

The Foolish bottom line
The current scenario for the sector is very encouraging, given that the recession has forced people to continue with their old vehicles rather than going for a new one. The trend can continue for a little while, which may boost the U.S. automotive aftermarket industry past the $36 billion market reached in 2010.

Add in the company's valuation and its strategy of expanding through service and tire centers, and the company looks pretty attractive and worth keeping an eye on.

To add Pep Boys to your stock watchlist click here.

  • To add to AutoZone to your Watchlist click here.
  • To add to Advance Auto Parts to your Watchlist click here.
  • To add to Genuine Parts to your Watchlist click here.
  • To add to O'Reilly Automotive to your Watchlist click here.

Navneet Bajaj does not own shares of any of the companies mentioned in this article. 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.

  


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