Pep Boys – Manny, Moe & Jack (NYSE: PBY) has been a disaster since its private equity group buyout imploded.  Or has it?  When companies lose a buyer it is never a good thing.  The deal was delayed earlier in May due to a recent material change in the strength of Pep Boys’ business. Where this gets interesting is that Pep Boys may be representing a great value here.

If you look at the statistics, they simply speak for themselves.  The May 30 trading data shows that Pep Boys opened at $8.59 and hit a low of $8.31.  With 11.2 million shares trading hands, Pep Boys actually hit a high of $9.04 on that day and managed to close at $8.89.  Now shares are up more than 4% at $9.28 on Thursday with almost 3 million shares trading hands as of about 1:30 PM EST.

Now comes the caveat.  You have to know that Pep Boys is not going to live up to analyst expectations.  Gores would not have walked away if business was going along just fine.  Be advised that there are only four analysts making estimates from Thomson Reuters for the current fiscal year (January 2013), and they are very different from high to low.  The consensus is officially $0.82 EPS and $2.16 billion.

Now, throw those estimates right out the window.  The company did confirm that its recent results have been impacted.  The past year was $0.51 EPS and $2.06 billion.  This is a total guess, but let’s just go out on a limb and predict that Pep Boys will make $0.50 EPS and that sales will dip to $2 billion rather than post a near-5% growth figure.

Here is what the company has noted.  It is getting a $50 million deal break-up fee, plus it is being reimbursed for “certain merger related expenses.” The company stance is that its financial position “is solid” and the company plans to use its cash on hand and the settlement proceeds to pay down its term loan this year and also to refinance its senior subordinated notes in 2013 ahead of the 2013 and 2014 debt maturities.

At the same time, AutoZone Inc. (NYSE: AZO) is worth $14 billion, O’Reilly Automotive Inc. (NASDAQ: ORLY) is worth $12 billion, and Advance Auto Parts Inc. (NYSE: AAP) is worth $5.3 billion.  Even after the 10% bounce from the bottom, Pep Boys is still worth less than $500 million in market value.  Maybe there is still some room here after all.  After the Gores deal was announced it is impossible to not notice that Pep Boys shares were trading above $15.00 for over a month and trading above a buyout price is generally a signal that many investors think a  rival buyout offer could be headed that way.

It needs to be noted that Pep Boys shares dropped to $11.62 on May 1 and the stock traded over 12 million shares that day after having closed at $14.93 the prior day.  The stock jumped from $12.08 to $14.93 on January 30 when the deal was announced and this stock was up above $14.00 before the “Sell in May and go away” took place a year ago.

Calling anything “value” is hard to get excited about in a market selloff and when you know that the company is going to deliver poor results that drive down estimates.  Still, a 10% bounce is a pretty clear sign that maybe this one got oversold.

JON C. OGG

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