Argus Slashes Pep Boys From Buy To Sell

• Pep Boys-Manny Moe and Jack (NYSE: PBY) shares are up 54 percent year-to-date, having spiked from around $12 to $14.99 between October 23 and 26.
• Argus analyst Bill Selesky downgraded the rating on the company from Buy to Sell, while maintaining the price target at $15.
• The stock has reached the price target, after having surged on the Bridgestone buyout offer, Selesky said.

On October 26, Tokyo-based Bridgestone Americas inked an agreement to acquire Pep Boys for $15 per share, or approximately $835 million. The transaction is expected to close in early 2016. While another suitor for the latter company may emerge, there is less than a 50 percent possibility of the bid being higher than the current one, analyst Bill Selesky mentioned.

The Bridgestone offer represents a 23 percent premium to Pep Boys’ closing price just prior to the announcement, and a 62 percent premium to the company’s share price on May 19, 2015, when rumors of a deal first surfaced.

Pep Boys’ shares surged close to the price target, following the news of the announcement. Given the current share price and the risk, albeit small, of the Bridgestone transaction not succeeding, the Sell rating is appropriate, Selesky commented.

In the report Argus noted, “We are maintaining our FY15 diluted EPS estimate of $0.27 for PBY, above the consensus of $0.26. Our estimate assumes 3Q15 comp growth of 1.1% and 4Q comp growth of 0.9%, in line with consensus forecasts. We are also maintaining our FY16 diluted EPS estimate, on a standalone basis, of $0.35, which assumes positive comps and slightly higher gross margins next year.”