Wednesday, May 30, 2012

Pep Boys


Things have not been going well lately for Manny, Moe, and Jack.

The Pep Boys (ticker PBY) have not been meeting Wall Street targets for some time.  A deal to sell the company to the Gores Group fell through to much embarrassment.


The stock has been crushed by investors, losing 25% of its value today alone.  The stock closed today at $8.89 per share.

All this makes this automobile maintenance chain a natural investment for me.  I'm a huge bull on this stock going forward.  I view the current share price of $8.89 an infinite call on the company's common stock.  To me, these are the perfect investments no matter what happens next, win or lose.



The loss is clearly defined in advance and the upside has major potential.

So why do I like the Pep Boys?

PBY has lots of real estate.  Nearly $12 a share in real estate.  Here are some of Pep Boys current sales listings to give you some idea of what they own.  Just imagine lots of their stores. 



Plus $1 a share in cash with no great cash burn ahead.

Plus the company just got a $50 million breakup fee from Gores.

Plus the average age of an American car is getting older.  Believe it or not, the current average is over eleven years.  Someone has to fix all those old cars, put new tires and batteries in them, and replace all those mufflers.



Gores offered to pay $15 per share.  Someone will come along with a similar offer.  In the meantime, enjoy the 1.1% dividend yield.  What LEAP call do you know that pays a dividend?

In my way of thinking, if you buy PBY at the current price you get hard assets worth $13 for the purchase price of about $9---AND you get the automobile repair business with 7,000 service bays in 700 locations in 35 states and Puerto Rico for free.



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