Glenhill Advisors Owns 5% of The Pep Boys – Manny, Moe & Jack (PBY)

According to a 13G filed with the SEC, Glenhill Advisors owns 2.7 million shares of The Pep Boys – Manny, Moe & Jack (NYSE:PBY), an auto parts retailer and auto maintenance company with a market capitalization of about $650 million (on average over 400,000 shares are traded per day, so with the current market price above $12 there is plenty of dollar volume for most investors). We track quarterly 13F filings from hundreds of hedge funds and other notable investors as part of our work researching investment strategies (for example, we have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) and can see that Glenhill’s current position is an increase over the 1.6 million shares it had owned as of the end of March (find Glenhill’s favorite stocks). The fund now owns 5% of the total shares outstanding.

The first quarter of The Pep Boys – Manny, Moe & Jack (NYSE:PBY)’s fiscal year ended in early May. The company’s 10-Q shows that both merchandise and service revenue edged up versus a year earlier, causing a 2% increase in total sales. This was offset by higher costs, however, and so The Pep Boys – Manny, Moe & Jack (NYSE:PBY) earned essentially no pretax income for the quarter (reported earnings did increase, but this was only because of an income tax benefit). Pep Boys generated a bit over $9 million in cash flow from operations, down considerably from the prior year period and also a bit less than the cash which the business used on capital expenditures.

While earnings have been low on a trailing basis, Wall Street analysts are optimistic about The Pep Boys – Manny, Moe & Jack (NYSE:PBY) with their consensus forecasts for the forward fiscal year implying quite a bit of growth in earnings per share. Still, the forward P/E ends up at 18, which seems somewhat high; in addition, we’d noticed very little revenue growth for the company, in addition to the fact that pretax margins and cash generation have been down. As a result we’re not particularly excited about the stock. Billionaire Mario Gabelli’s GAMCO Investors had reported a position of 4.9 million shares at the end of the first quarter of 2013 (check out Gabelli’s stock picks).

We can compare The Pep Boys – Manny, Moe & Jack (NYSE:PBY) to Advance Auto Parts, Inc. (NYSE:AAP), AutoZone, Inc. (NYSE:AZO), and O’Reilly Automotive Inc (NASDAQ:ORLY). O’Reilly Automotive is the most expensive of these peers on a trailing basis, though even it is still priced at a discount to The Pep Boys – Manny, Moe & Jack (NYSE:PBY) with a trailing earnings multiple of 24. In its most recent quarterly report revenue and earnings were up only modestly compared to the first quarter of 2012, and so it doesn’t seem like a good buy at this valuation.