Best Buy Stock Has a Lot to Prove on Thursday

By Rick Munarriz Markets Fool.com

A lot of investors have grown poor betting againstBest Buy(NYSE: BBY), assuming that either the emergence of Amazon.com (NASDAQ: AMZN) or the popularity of digitally delivered media will make the big-box concept obsolete. The consumer-electronics retailer keeps on ticking, and it's now just 2% from revisiting its 52-week high. If it's able to move higher, the stock will be at its highest level since late 2007.

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Best Buy will have a good shot at doing just that when it reports fresh financials on Thursday morning. A strong showing would be more than enough to push the stock to a new 10-year high.

Image source: Best Buy.

Plugging things in

Wall Street has modest expectations for Thursday.Analysts see $8.27 billion in revenue, 2% below the prior year's fiscal-first quarter results. Declining sales shouldn't come as a surprise, as Best Buy has posted lower top-line results for six straight years.

Analysts are holding out for a profit of $0.40 a share, just below the $0.44 Best Buy delivered a year earlier. An important note here is that Wall Street pros were forecasting earnings of only $0.35 a share last year, and that's not the only time analysts have underestimated the superstore chain's earnings power.

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Quarter Estimate EPS Difference
Q1 2016 $0.35 $0.44 26%
Q2 2016 $0.43 $0.57 33%
Q3 2016 $0.47 $0.62 32%
Q4 2016 $1.67 $1.95 17%

Image source: Yahoo! Finance

Wall Street doesn't seem to have a firm grasp on Best Buy's earnings power. It has beaten analyst profit targets by 17% or better in each of the past four quarters. Another double-digit-percentage beat -- a notion that doesn't seem ludicrous given recent momentum -- and suddenly profits aren't declining at all.

The market rewards companies that exceed expectations, explaining in part, at least, why Best Buy stock is trading higher than it was when sales peaked six years ago. However, even some historically critical voices are starting to give Best Buy and CEO Hubert Joly's turnaround strategy a fighting chance. TheBarron's cover story over the weekend was about nine retailers nimble enough to thrive in Amazon's shadow, and Best Buy made the cut.

With rivalsclosing down storesand the iPhone 8 rollout in a few months likely to lift sales for all mobile-friendly concepts, it may seem like a good time to believe in Best Buy. However, with the stock already trading 21% higher year to date after last year's 40% surge, one has to wonder if another period of better-than-expected earnings results isn't already priced into the stock. There's a big test coming for Best Buy stock on Thursday morning.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.