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Friday, 12/19/2003

A Little Pep Talk for 2004
By Nich Sheldon
PBY - Pep Boys

Company Description

Pep Boys has 595 stores and over 6,000 service bays in 36 states and Puerto Rico. Along with its vehicle repair and maintenance capabilities, the company also serves the commercial auto parts delivery market and is one of the leading sellers of replacement tires in the United States. Customers can find the nearest location by calling 1-800-PEP-BOYS or by visiting

[Source: Company Press Release]

Reasons to Invest:

Now that 2004 is drawing nearer, its time to zone on the stocks that have really taken off this year. Speaking of taking off, this week's Drip of the Week was one heck of a comeback story over the past year. Not to mention, they have paid an uninterrupted cash dividend for the past 53 years.

Some of Pep Boys institutions recently added 4.3 percent to their holdings, which is a sign that the comeback may still be in effect for 2004.

Maybe some of you are wondering why I would call PBY a comeback candidate? Perhaps a few of you already know. Over their third quarter, PBY's net income fell to $14.7 million, which is close to a million less than their previous Q3 net income of $15.4 million. Same store sales increased at a percentage of 2.2, which is nice to hear, however the prior three quarters were in the red.

Most analysts would say that Pep Boys new CEO Larry Stevenson is the person to thank for this turnaround. He closed 33 stores, launched a new ad campaign, and redesigned a few of the stores. Stevenson mentioned in an interview that new products are also what has helped urged sales in his stores.

Moreover, the fundamentals are not quite right for the stock, as I am still a little worried about their previous poor performance and restructuring costs. Their total debt to equity ratio is 0.88, profit margins and returns on assets are also in the negative.

While these figures are not up to par yet, their chart looks mighty nice. PBY broke out of an inverse Head and Shoulders (on their monthly chart) in October of 03, and this reversal was confirmed by the expansion in their volume. On this breakout, the Point and Figure chart produced a fresh buy signal. The PnF chart was further backed by a break above the 20 range which was analysts expected round-figure resistance. The MACD exploded into a buy signal and the stocks OBV charged higher over the remainder of this past year.

While I think that PBY has had a nice recovery over this past quarter, I am not suggesting entries on the DRIP until I see a retest of its head and shoulder neckline, or a pullback to the 17-19 area. If this target is reached I could see this stock being impetus, and detrimental to its main competitor, AutoZone (NYSE:AZO).

Furtive as this stock has been over the past few months, I would be surprised to see PBY retrace its March low of $6.00. PBY is currently trending in a 9 month retracement channel, of which when traced to December of 2004, shows a profit margin of 20+ points. While I am not sure we will see the stock reach over 40 by year end 2004, I would like to suspect to see it retest the 35 range (last seen in 1997). This price projection is easily foreseeable when you consider that the PnF chart showed a double- top-breakout buy signal in mid-October of 2003, indicating that there is still room to go on PBY, perhaps up to 64, which is the bullish vertical count on the stock.

On top of that, Reuters Investor shows that PBY was ranked 89th out of 99 (99 being the best price performer) over the past year, which further expresses the fact that people are still interested in this comeback stock. Reuters also notes that PBY has a new entry risk rating of "low." This rating is their best guess on the precautions you should consider if you were to enter the stock today.

The company is also projecting a 2.38 percent dividend growth rate over the next five years, which is intriguing when one considers that their annual dividend is only $0.27, which comes out to a yield of 1.26 percent.

In addition, PBY's 52-week price change is 91.07 percent, which comes out to 58.17 percent when relatively compared to the S&P 500's 52-week change. I am hoping for more of the same over the next few years.

While the dividend percentage on PBY is not to enticing, I am intrigued that this stock is going to continue trending higher over the next few years. While I'd like to see a dividend of at least $0.75 to consider a stock as a DRIP candidate, I feel that the potential for my investment to double over the next few years is high. I am also happy to note, that the company does not charge any reinvestment fees.

This ends another exciting episode of the Drip of the Week. Stay tuned next week, as we will spotlight another stock worthy of the limelight.

Until Next Week,
Nich Sheldon

Broker Recommendations

Strong Buy         1
Buy                2
Hold               0
Sell               0
Strong Sell        0

Brokers Covering  3

DRIP Information:
Shares to Qualify = 1
Auto-reinvestment = No
Accept Foreign Accounts: Yes
Temper Enrollment: Yes

Min/Max Investment = $10,000/Quarter

Reinvestment Fees - 
Dividend investment fees: 0
Cash investment fees: 0
Auto reinvestment fees: None

Transfer Agent:
American Stock Transfer

Corporate Headquarters:
3111 West Allegheny Avenue
Philadelphia, PA 19132
Phone: (215) 430-9000
Fax: (215) 226-2323


Copyright 2003

Do not duplicate or redistribute in any form.
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