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Everyone who owns a cars needs auto parts. All cars break. Broken things need replacements. Auto parts providers are the haven for all things needing replacement. Because autos are so intrinsic to American life, any industry that services those autos is worth investing in.
There are many auto parts stocks, but the one you should avoid is The Pep Boys – Manny, Moe & Jack (NYSE: PBY). Its first-quarter earnings report – and lack of a permanent CEO – will illustrate why that’s the case.
Sales for the quarter stumbled ahead by 0.6% to $542 million from $539 million. Of course, the more important metric is same-store sales. That’s where we truly get a look at how stores that currently exist are doing. Comps were pretty lousy, up only 0.8%.
Net income was $11.9 million, or $0.22 per share, which was a significant improvement from last year’s $1.6 million, or $0.o03 per share. Alas, the difference was almost entirely due to a lease sale of $10 million.
That’s why we want to look at operating profit, which was $13.1 million as compared to $11.2 million last year. Still, that is a 15% increase, and not to be scoffed at.
Pep Boys is a bit different from other providers in that 76% of its revenue comes from servicing vehicles, and only 24% from merchandise sales, which is the higher-margin business.
Cash flow is improving, up to $33 million. Free cash flow hit $21 million this year, up from negative $3 million last year. The company has $42 million in cash and $194 million in debt, accruing interest at about 6.5%.
Where’s the Pep?
When it comes to auto parts stores, though, Pep Boys just can’t hold a candle to its competitors. The stock has gone nowhere, while competitors have seen their stocks rise between 250% and 400% over the past five years.
Just look at the metrics.
O’Reilly Automotive (NASDAQ: ORLY) has $249 million of cash and $1.4 billion in debt. Free cash flow for 2012 was $950 million. In 2013, free cash flow was $513 million, and in 2014 it was $761 million.
O’Reilly’s earnings this year are pegged to rise 16%. The stock is trading at $226, which at 29 times trailing 12-month earnings is not unreasonable for a growth stock.
AutoZone (NYSE: AZO) has six times as many stores as Pep Boys’ 800 locations. There’s just no comparison. About 10% of its store base is also in Mexico. While it has only $117 million of cash, and more debt at $4 billion, it’s also paying less on that debt – about 4%.
AutoZone’s free cash flow has been explosive for the past three years: $844 million in 2012, $1.01 billion in 2013, and $903 million last year. Earnings are growing at a 14% rate, and the stock has a trailing price-earnings ratio of just under 20, which also isn’t unreasonable.
Pep Boys simply can’t compare. Although analysts project 14% annualized growth going forward, it’s hard to justify more than a $5 share price for a company with fiscal year 2016 earnings projections of only $0.24 per share. It’s currently trading around $12 per share.
Now, you could choose Pep Boys as a potential turnaround play. There is value in the company’s real estate worth considering. Otherwise, I’d go with the big boys, not the Pep Boys.
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