Pep Boys (PBY), the nation’s leading automotive aftermarket service and retail chain, announced Friday that it had acquired 17 Discount Tire Centers in Southern California from AKH Company, Inc.
This acquisition, combined with an upbeat earnings report, a significant pullback and favorable backing from analysts, is a great catalyst for the recovery of PBY, which is down about 10% since early August.
Let’s take a closer look at these factors that will reverse the present downturn of The Pep Boys share prices:-
1. Acquisition of 17 Discount Tire Centers Adds More Value
Though parts-oriented chains, such as AutoZone (AZO) and O’Reilly Automotive (ORLY), are also looking to expand, PBY is doing so in a different way–by increasing consumers’ access to their business. In contrast, AutoZone has focused on growing its e-commerce business, which posted 80% growth in its fiscal second-quarter. Meanwhile, O’Reilly has looked to more traditional expansion through its acquisition of VIP Auto Parts, greatly boosting its presence within New England and also looking at growth opportunities in California, Florida, and the greater Chicago area.
Still, Pep Boys sees opportunity in serving customers directly, and has already undertaken concrete steps to expand – which has taken the form in the recent acquisition. These 17 service and tire centers are located throughout the greater Los Angeles market, from Bakersfield to Orange County. They will re-open on September 12, 2013 as Pep Boys stores and provide full-service vehicle maintenance and repair, including brand-name and private-label replacement tires.
With this acquisition, 75% of Los Angeles-area residents now live within three miles of a Pep Boys location. This means that Pep Boys has nearly 150 locations in California, and now have even more convenient locations to help customers get quality tires and full-service maintenance and repairs, all at a great value.
2. Earnings Look Much Better
On Tuesday, Pep Boys is expected to announce its earnings, with an increase in EPS to $0.19, compared to last year’s EPS of $0.12.
Pep Boys are also expected to have a revenue increase of 4% and will see store units increasing by 5%.
The store unit increase would mainly be driven by the smaller service centers, whose sales per store are more than 60% less than the average supercenter.
Q4 should have upside potential as well, due to the mild winter of the past two years.
3. Pullback Provides Great Entry Price
With a recent loss of -1.82% to $11.33, the share price of Pep Boys has moved down from its 20-day moving average with -4.98% pullback and the 50-day moving average with a gap of -6.22%.
4. Analysts are Happy with PBY
Zacks upgraded shares of Pep Boys from an underperform rating to a neutral rating with a $12.50 price target on August 20. This means Zacks’ target price points to a potential upside of 0.40% from the company’s current price.
Separately, analysts at Argus raised their price target on shares of Pep Boys from $12.00 to $15.00 Wednesday, June 12. They now have a “buy” rating on the stock.
Recommendation
Therefore, with analysts seeing Pep Boys earnings improving, and offering a combination that many of its peers don’t — seeking to offer automotive service and car-parts sales in a single unit — makes for a very positive options call which should bring in a 57% profit.
OPTIONS TRADE: Buy the PBY Jan 2014 13.000 call (PBY140118C00013000) at or under $0.35, good for the day. Place a protective stop limit at $0.15 and a pre-determined sell at $0.55.
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