Sirius (SIRI) has been one of my top picks. In fact, since I first promoted the firm here, the stock has surged 30.6% and there are increasing signs that this bull run still has more to go. Alas, there will always be critics; but, the bears have simply overstayed their welcome. In this article, I will walk you through my DCF model and prove once and for all that Sirius has nowhere to go but up. More so than Netflix (NFLX), Sirius has an enduring business model that, in my view, will rival the likes of Time Warner (TWX). As an investor relations consultant, I find that Sirius has a compelling story. AltiGen (OTC:ATGN) and AirTouch (OTC:ATCH) also should be on your investment radar.
First, let's begin with an assumption about revenues. Sirius has taken off like a rocket, and analysts are modeling 19.8% growth over the next few years. This sentiment is reasonable considering the firm has plenty of opportunities to monetize operations as demand improves.
Moving onto the cost-side, there are several items to address: operating expenses, taxes, and capital expenditures. I expect cost of goods sold to continue the downward trend - going from 36.5% of revenue in 2012 to 34% in 2017. I further model SG&A and R&D eating 30% and 1.6% of revenue, respectively. I forecast capital expenditures as 8% of revenue over the same 6-year period. As for taxes: Sirius has accumulated around $7.8 in net operating loss carryforwards to shelter taxable income.
We then need to subtract out net increases in working capital. I model accounts receivable as 6.5% of revenue; inventories as 2% of COGS; prepaid expenses as 14% of SG&A; and accrued expenses as 8.5% of SG&A.
Taking a perpetual growth rate of 2.5% and then discounting backwards by a WACC of 15% yields a fair value figure of $4.60. This is already a very conservative estimate and does not consider improvements to the capital structure. It does, however, factor in the NOLs.
All of this falls under the context of astonishingly excellent margins:
We are very pleased to report our 2011 results met or exceeded the guidance we gave you at the beginning of the year, and I'm even more excited about our prospects for accelerating revenue and adjusted EBITDA growth in 2012. We expect to deliver a very good year across the board in 2012.
In 2011, we delivered the best year of subscriber growth since the merger of Sirius and XM by adding 1.7 million net new subscribers. Revenue reached a record of over $3 billion. Adjusted EBITDA climbed 17% to a record $731 million, beating our guidance of $715 million. Free cash flow essentially doubled to a record $416 million, beating our forecast of $400 million. These statistics paint a picture of remarkable growth and record achievements in 2011, and had we not been constrained on the revenue side by our agreement with the FCC and other litigation, our numbers would have been even stronger. Those handcuffs are now off for 2012 and beyond.
So, when people lament that Sirius trades at a respective 33.6x and 21.4x past and forward earnings, just tell them to review the fundamentals. I love almost everything about Sirius: the management team, the monetization opportunities, the customer loyalty, the innovation, the business model. Hey, Netflix trades at a respective 26.2x and 43x past and forward earnings. But, unlike Sirius, it is largely a broken business led by doubted management. Time Warner, which trades at only a respective 13.5x and 10.1x past and forward earnings, even has the potential to kill Netflix. Not so for Sirius for the reasons I listed above.
Consensus estimates for Netflix's EPS forecast that it will bleed $0.25 in 2012 and then spike to $2.54 in the following year. Sirius is a much safer pick considering the sustainability and potential for aggressive buyback activity. And Time Warner: assuming a multiple of 13x and a conservative 2013 EPS of $3.57, the stock has 26.4% upside.
Did you hear that sound? That's Sirius getting ready to take off like a rocket - make sure that you get your ticket.
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