This Automotive Retailer Looks Attractive

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

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.


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.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1582382, ~/Articles/ArticleHandler.aspx, 10/25/2016 8:37:55 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 11 hours ago Sponsored by:
DOW 18,223.03 77.32 0.43%
S&P 500 2,151.33 10.17 0.47%
NASD 5,309.83 52.43 1.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
PBY.DL $0.00 Down +0.00 +0.00%
The Pep Boys CAPS Rating: **
AAP $141.10 Down -0.83 -0.58%
Advance Auto Parts CAPS Rating: ****
AZO $752.94 Up +5.96 +0.80%
AutoZone CAPS Rating: ***
GPC $91.02 Up +0.43 +0.47%
Genuine Parts Comp… CAPS Rating: *****
ORLY $279.29 Up +3.73 +1.35%
O'Reilly Automotiv… CAPS Rating: ****