Last month, Pep Boys - Manny Moe & Jack (PBY) agreed to be bought by tire giant Bridgestone Americas Inc. in an all-cash deal. Here's an overview of what's behind the decision.
Why Pep Boys agreed
During the first quarter, Pep Boys’ board of directors announced a review of strategic alternatives to enhance shareholder value.Â
In recent years, the iconic auto repair chain failed to boost revenues, particularly with its “do-it-yourself” retail sales and merchandise.
Total revenues for the fiscal year were up only about 1% from three years ago and its revenue growth has come from its service department, while its merchandise sales and DIY segment have been falling.
Benefits for Bridgestone
Through this deal, Bridgestone can push deeper into the auto-parts industry. There are more cars than ever on U.S. roads and they’re older than ever, so auto-parts chains are seen as a bright spot in the retail market. The new generation of more high-tech cars have sophisticated parts and are more expensive and difficult for amateurs to work on.
The deal would accelerate its growth plan by adding 35% more locations to its existing 2,200 nationwide tire and auto service centers.Ă‚
Through the network distribution of Pep Boys, Bridgestone will be able to reach even more consumers.
Benefits for Pep Boys
This transaction delivers a significant premium for Pep Boys’ shareholders and offers new opportunities for its employees across a bigger business.
Pep Boy’s shared expertise and commitment to its customers and employees will help it to build an even stronger organization.
Pep Boys' retail business and its mixed retail and service format have been suffering in recent years as fewer Americans fix their own cars, and chains such as AutoZone Inc. (AZO) and Advance Auto Parts Inc. (AAP)Ă‚ grew more quickly. This deal gives Pep Boys a new opportunity to boost its retail business.
Pep Boys' most recent quarter
The company reported the second quarter as the fourth consecutive quarter of positive comparable store sales. They believe their biggest opportunity is to grow top-line revenue.
- Sales increased by 0.1%
- They reported net earnings of $4.8 million, compared with a loss of $273,000 in the prior year, but it still missed analysts’ expectations
- Diluted EPS rose by 9 cents over the year-ago quarter
- Total revenue increased by 0.7% from the year-ago quarter
Pep Boys' price and fundamentals
The company has a market cap of $808.17 million with strong fundamentals according to the last fiscal year.
Profitability and growth has been rated by GuruFocus as 5/10. Returns are negative and below the average performance of the Global Auto Parts industry. ROE of -2.20% and ROA of -0.77% are underperforming 85% of competitors in the industry. Profitability is weak as well and is ranked lower than 83% of its competitors, with operating margin at 18.65% and net margin at 16.96%.
Financial strength has been rated by GuruFocus as 6/10, but the current ratios such as cash to debt at 0.32 and equity to asset at 0.36 are underperforming 71% of other companies in the industry.
The price of the stock has risen by 55% during the last 12 months and is now trading near its 52-week high and 87.13% above its 52-week low.
During the third quarter, Mario Gabelli (Trades, Portfolio)’s GAMCO Investors slightly reduced its stake by 2.08%, but he is still the main shareholder among the gurus. Second is Donald Smith (Trades, Portfolio) with 2.22% of outstanding shares, followed by Jim Simons (Trades, Portfolio) with 1.1%.
Disclosure: I do not hold any position in the above-mentioned stocks.
