Do you remember the arcade game “Whack-a-Mole”? You stand over a board with holes trying to hit the gopher that dares to stick out his head.
Fun stuff. Not so fun if you are a publicly traded company!
Taking the role of the mole these days are companies like Pep Boys—Manny, Moe & Jack (PBY). Imagine trying to operate in the retail market tied directly to the automotive industry as PBY does (see, “Can Can General Motors (GM) Pull a U-Turn?“).
They are getting hit over the head over and over again. It is a perpetual game of “Whack-a-Mole”. Or is it?
On tuesday, after the stock market closed PBY announced its second quarter earnings. Despite the challenging operating environment the company managed a profit of $.10 beating analyst estimates by a whopping $.03.
The news appeared to be positive. So why is the stock down more than 20% on the news today?
Well, in the release, PBY noted that sales were down by 9% with same store sales down 7.5%. The company managed to do as well as it did with cost cutting and lower interest expenses due to a pay down of debt.
Wall Street was hoping for sales of $515 million in the quarter. PBY delivered $500 million. Is that $15 million miss worthy of a 20% loss of market cap?
The market is acting very inefficiently here. Those companies that fail > to meet expectations are getting taken to the proverbial wood shed. There is no forgiveness by traders.
Never mind that PBY actually beat estimates on the profit side. What is more important: Sales or profit?
Obviously both, but I would argue that hitting the profit number is fairly impressive. Using the mole analogy, we have a company here that is getting absolutely pummeled with respect to its operating environment.
The news could hardly be worse and yet the company delivered on the bottom line. You have to respect that performance as an investor. Instead the market takes $2 or more off PBY’s valuation.
Blame the Economy… Again
In my humble opinion, the sales shortfall is a direct result of an operating environment that is about as bad as it can get for PBY. The fact that they missed the mark by only $15 million is actually pretty impressive. The economic environment will change and when it does investors in PBY will be rewarded (see also, “A Healthy Dose of Reality“). I would view the sell-off today as an opportunity to own shares at a discounted price.
With the selling, shares now trade for a modest multiple of forward earnings. There is minimal debt on the balance sheet and about $1.7 in cash as of the last earnings report.
PBY is a great contrarian play. At some point, this mole will stick his head out and not have to worry about getting whacked!