NEW YORK (TheStreet) -- CarMax (KMX), one of the largest automobile retailers in the U.S., will report first-quarter fiscal 2016 earnings Friday before the opening bell. Investors who didn't buy but waited for a better entry point in the company's shares are likely to be disappointed.
CarMax's shares, which closed around $72, up 8.4% for the year to date, are trading near their all-time high and have a price to earning ratio of 26, which is five points higher than the S&P 500 (SPX). So KMX is not cheap. However, the company is expected to benefit from rising auto sales.
That puts CarMax, headquartered in Richmond, Va., in the driver's seat and the reason why the average analyst earnings estimate for the quarter has climbed twice in the past three months, now at 86 cents per share from 84 cents. Revenue is projected to climb some 11% year over year to $4.15 billion. For the full year ending February, the average estimate calls for earnings to climb 14% year over year to $3.04 per share.
Just as with the quarterly projections, full-year estimates have also trended higher, climbing almost 4% in the past three months from prior estimates of $2.93 per share, on revenue of $15.84 billion, which is expected to be up 11% year over year.
Are analysts getting too optimistic? Perhaps. But the upward revisions also suggest analysts have had a tough time keeping up with CarMax's performance, as evidenced by CarMax having beaten Wall Street's revenue and earnings targets for four consecutive quarters.
All told, KMX shares have responded accordingly. Investors have enjoyed more than 11% gain in the past three months. The stock still looks cheap based on fiscal-year 2016 average earnings estimates of $3.42 per share. Assuming KMX can reach that target, its P/E drops to 21 -- a more attractive multiple against a P/E of 17 for the S&P 500.
Sure, there's some implied risk with KMX. But how many companies in the S&P 500 operate in an industry such as auto sales that is growing at decade highs? Estimates for the just-ended quarter could be too low.
So buy KMX shares ahead of Friday's results as the stock, which has a high analyst target of $77, suggests gains of 6%.