Put Pep Boys in Your Rearview Mirror as Earnings Keep Hitting Roadblocks

NEW YORK (TheStreet) -- Auto parts retailer Pep Boys (PBY), which reports first-quarter earnings results Monday after the close, is shopping itself around. If you believe the rumors, the company, which also specializes in automotive repair, has received interest from multiple suitors for a potential sale.

Put the company in your rearview mirror and drive away, at least for now.

Pep Poys, headquartered in Philadelphia, has worked to increase revenue from its retail operations but various competitive issues are putting pressure on margins. It is facing competition from much nimbler rivals including Advance Auto Parts (AAP) and AutoZone (AZO).

Even Wal-Mart (WMT) in the mix, selling some of same products found at Pep Boys at lower prices and offering auto services such as handling oil changes. 

This is not new. Competitive pressures have long been shown in Pep Boys' operational results, including missing analysts' average earnings estimates for three straight quarters. In the last seven quarters, Pep Boys has missed analysts' average revenue targets six times, including a miss in the fourth quarter by some $4.3 million. Despite these issues, PBY stock is up more than 7% in 2015, besting the broader averages.

Don't get caught up in the hype. Not only have analysts' average estimates for the just-ended quarter dropped to 3 cents from 8 cents per share, the average estimate for the quarter ending in July has also been reduced to 8 cents from 13 cents per share in the past three months.

Booming auto sales would ordinarily bode well for auto-parts retailers and auto servicing companies like Pep Boys. More new cars on the road means consumers are likely to shop for more auto parts and accessories, and they'll always need new tires and oil changes.

That estimates for Pep Boys are trending lower would imply that the average analyst lacks confidence Pep Boys can secure enough business amid a thriving auto market.

The only thing raising the stock is rumors about an acquisition. Just in the past month, PBY stock has spiked more than 15%. This means, prior to the rumors, the shares were down some 8%. What do you suppose happens when the rumors turn out to be a dud? The shares will fall back down to where they were prior to the rumors.

In that vein, investors should take profits now and avoid PBY stock until there is more clarity about its future, or until the company can string together two or three strong consecutive quarterly performances.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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