| RealMoney by TheStreet.com Pep Boys The troubles of the domestic auto industry have been well-documented, as has the recent resurgence in sales, generated by the "Cash for Clunkers" stimulus program. The company has 570 retail stores across 35 states and Puerto Rico. But how does Pep Boys fit into the mix? I'm here to answer investors' questions: Should You Buy It? Can the stock continue to run, or will Pep Boys pull back toward the mid single digits? The company announced mixed second-quarter results last month, with lower sales offset by cost-cutting. Service revenue has been the most consistent area for Pep Boys, while management has seen materially lower demand for discretionary items in the retail stores. The company was in the news this week, as management acquired a chain of 10 tire shops in Florida on Tuesday. Pep Boys paid just $4.3 million for the stores but expects the deal to add to earnings in the first year. Management also boosted its target for 2009 store growth to 25 locations as a result of the deal. Additionally, the company is looking to add 40 new locations in 2010 and 80 more in 2011. These growth targets could be hampered by the $300 million-plus of debt (70% of common equity) that Pep Boys has on its balance sheet, compared with just $22 million of cash. The company cut its dividend 56% in March but still pays investors 3 cents a share, for a 1.2% yield. Pep Boys has leverage to an economic recovery, but the stock isn't cheap at current levels. Even with earnings expected to recover from a loss of 48 cents per share in fiscal 2009 (ended January) to a profit of 43 cents per share in fiscal 2011, the company is currently valued at 22.8 times forward numbers. This is much higher than the average forward P/E ratio of 13.3 at three competitors: Advance Auto Parts With that in mind, I believe that readers should avoid the stock at current levels, given Pep Boys' premium valuation. There is little visibility for a turn in retail sales, and I believe the company's store expansion plans over the next several quarters will prove aggressive.
David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback; click here to send him an email.
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