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Bull of the Day

Sometimes it just feels good to bust up your knuckles and get your hands dirty. It’s that primal male instinct that provides instant satisfaction, like starting a bond fire or smashing a bug. I can hear the low grunt of Tim Allen in the background. If you’ve got that hands-on gene in you then you probably love the smell of fresh rubber and cleaner like I do too. Walking into my local auto parts store is a religious experience.

Well in a world of an aging auto fleet walking your money to the correct auto parts stock could bring you heavenly returns. There are a few to choose from given that the industry is in the top 4% of our Zacks Industry Rank. One of these companies that is lighting up as a Zacks Rank #1 (Strong Buy) is Pep Boys (PBY - Snapshot Report).

Pep Boys calls itself the “Founders of the Automotive Aftermarket.” The Philadelphia based company has 798 locations across 35 states and boasts $2.1 billion in revenue. The revenues stem from a mix of about 54% service, 35% do it yourself and 11% commercial.

The sweet spot for Pep Boys is vehicles between 5 and 13 years old. Most manufacturer warrantees expire before the 5 year mark so Pep Boys in there to fill that void. Service from a Pep Boys facility can be substantially less than that from a dealership.

Service has been a big part of the Pep Boys story and will continue to increase. The margins are greater on the service side than on the retail parts and it’s estimated that the service industry is four times the size of the do it yourself market. Pep Boys is trying to fill the value gap between the dealers’ expensive experience and the local, cheaper, unspecialized corner mechanic.

Analysts have taken notice of Pep Boys direction. Over the last 60 days two analysts have increased earnings estimates for the current year and three for next year. The upside revisions have pushed consensus a penny for the current year and up from 45 cents to 54 cents for next year.

For the quarter ending April 2014 Pep Boys surprised earnings to the up side by a penny, beating the 3 cents consensus. This is coming on the heels of a very disappointing Q1 where the company reported a 2 cents per share loss versus consensus estimates of a 6 cent gain.

Looking at the chart, you should have this stock on your short list to buy soon. Before the disappointing results of Q1, Pep Boys was trading near $14. Since the bad news hit, the stock unwound to come down and test the $9.75 level. The recent strength in last quarter’s numbers has helped to boost Pep Boys up back over the $10 hump.

There is still room for caution here. After a few recent down days, PBY has begun to trade below its 40 day moving average, indicating a short term downtrend for the stock. But the stochastic indicator is firmly in oversold territory and could flash a buy signal on the next bit of strength. Investors looking to jump in should wait to see confirmation of the bounce.


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