After riding roughshod over analyst earnings estimates all year long, CarMax (NYSE:KMX) finally sputtered to a halt last quarter, missing the Street's overoptimistic consensus target by a good 10%. Tomorrow, the world's biggest used car dealer tries to get back on track, reporting its first-quarter earnings for the new fiscal year 2008.

What analysts say:

  • Buy, sell, or waffle? Twelve analysts follow CarMax, which gets two buy ratings and 10 holds.
  • Revenues. On average, analysts expect CarMax to report $2.2 billion in quarterly sales, up 15% from last year.
  • Earnings. Profits are predicted to lag sales, with an 11% rise to $0.30 per share.

What management says:
In its presentation at a May 1 retail conference sponsored by investment banker Lehman Brothers (NYSE:LEH) was this, CarMax's most remarkable prediction may have been its growth projections for fiscal 2008. They're pretty much the same as its projections for the next five years -- meaning this firm isn't planning on slowing down any time soon. In 2008, CarMax intends to grow same-store sales by 3% to 9%. Long-term, the firm expects to achieve 4% to 8% growth. Same story with new store growth -- 17% in 2008, and rates bracketing that one, 15% to 20%, over the next five years. Put it all together, and CarMax intends to become an enterprise with anywhere from $15 billion to $20 billion in revenue come fiscal year 2012. 

What management does:
The story gets even better if CarMax continues to garner the gains from economies of scale that we've witnessed over the last 18 months -- gross and net margins up a respectable (for a retailer) 50 basis points. Operating margins up 110 basis points. Focusing on that operating margin, we see that CarMax is already more profitable than all but one of its competitors (America's Car-Mart (NASDAQ:CRMT) gets 5.9%); it edges out AutoNation's (NYSE:AN) 4.2%, and leaves United Auto Group's (NYSE:UAG) 2.7% operating margin in the dust.

Margins

11/05

2/06

5/06

8/06

11/06

2/07

Gross

14%

14.1%

14.2%

14.4%

14.5%

14.5%

Operating

3.7%

3.8%

4.2%

4.5%

4.8%

4.8%

Net

2.1%

2.1%

2.5%

2.6%

2.8%

2.6%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
As described by fellow Fool Mike Cianciolo last quarter, investors were underwhelmed with CarMax's projections for fiscal 2008. They particularly disliked its stagnant gross and operating margins, and the contraction of the net. But as Motley Fool Inside Value analyst Michael Olsen subsequently explained:

... [The] company expanded its store count 15% in the year past. The natural effect of this action is to depress operating margins, as older stores (i.e., greater than four years) tend to generate more robust margins. We believe the strength of the company's operating model -- its no-haggle pricing model, the strength of its information systems (which allow it to price more effectively than competitors), and strength of it[s] negotiating power in inventory acquisition (read: buying cars from individuals) -- will enable the company to continue to target profitable expansion opportunities in a highly fragmented industry.

If CarMax retains the 0.66 price-to-sales ratio investors currently award its stock, and if the firm hits even the low end of its sales target for fiscal 2012, it should be valued at just less than $10 billion in five years' time. That would give today's investors a clean double on their investment. Bump up revenue to the top end of the range, and you're looking at potentially 167% gains in five years, or 21% annually. Then combine that with the 69% return Inside Value members have enjoyed on their investment since Philip Durell recommended CarMax in January 2006, and you're well along the road to retirement.

Psst! CarMax isn't even the best performing stock in our portfolio. Find out what deep value investing can do for you. Claim a 30-day trial to Inside Value today.

Fool contributor Rich Smith has no interest, short or long, in any company named above.