Sirius XM Radio (SIRI) is a subscription fee based satellite radio provider offering commercial free channels ranging from entertainment to news. Last year, the company generated revenues of $3.01 billion and ended the year with 21.89 million subscribers.
The company has a market capitalization of $8.8 billion and is up 32% over the last year compared to the 5% gain in the S&P 500 index. SIRI has significant debt on its balance sheet relative to equity and has a debt to equity ratio of 4.28. The company currently does not pay a dividend. In this article, I will perform valuation analysis to determine the fair value for SIRI.
I started my analysis by reviewing the historical growth rates for SIRI. These are shown in the table that follows:
Growth Rates | 3 Year | YOY | QOQ |
Revenue | 5% | 7% | 8% |
Income | N/A | 892% | -188% |
EPS | N/A | 133% | N/A |
The company reported a net loss during financial years 2009 and 2008. The revenue growth has however accelerated during the last 3 years. Going forward, analysts expect the firm to grow at an annual rate of 20% compared to the 16% growth rate of the broadcasting radio industry. The broader markets are projected to expand at a long term grow rate of 11%.
Coming to profitability, the company's margins and operational efficiency are a mixed bag. Although SIRI was able to deliver a 94% return on equity last year, I would like to see a sustained performance before complimenting SIRI on its extremely high ROE ratios. The return on assets is low in my opinion. I require firms to deliver a minimum return of 8%. The table that follows presents the profitability and operational metrics.
Profitability & Operations | 3 Year | 1 Year | TTM |
Gross Margin | 57% | 59% | 59% |
Operating Margin | 12% | 24% | 24% |
Net Margin | 1% | 16% | 16% |
Return on Equity | -304% | 94% | 94% |
Return on Assets | 0% | 6% | 6% |
To compare SIRI's performance to that of its peers, I evaluated the margins and operational aspects of some of the other companies in the broadcasting industry. The peer selected as part of this analysis included Saga Communications (SGA), Salem Communications (SALM), Spanish Broadcasting System (SBSA), CBS Corporation (CBS), Emmis Communications (EMMS) and Cumulus Media (CMLS).
Ticker | Market Cap | P/E | P/S | D/E | ROA | ROI | GM | OM |
SIRI | 8.82B | 34.86 | 2.93 | 427.8 | 5.74 | 8.31 | 59.09 | 22.19 |
161.59M | 12.32 | 1.26 | 112.34 | 7.53 | 8.54 | 27.43 | 21.74 | |
69.92M | 12.15 | 0.34 | 154.99 | 0.33 | 0.35 | 32.9 | 16.78 | |
28.76M | 2.93 | 0.21 | 705.41 | 3.15 | 3.52 | 70.64 | 22 | |
20.00B | 16.21 | 1.41 | 60.13 | 5.07 | 5.98 | 41.26 | 17.75 | |
27.11M | 0.43 | 0.11 | 0 | -1.81 | -2.3 | 20.43 | 7.65 | |
493.26M | 2.54 | 1.87 | 0 | 9 | 10.83 | 39.31 | 27.05 |
Note: GM - Gross Margins; OM - Operating Margins
Valuation:
Valuation analysis was performed using relative valuation. The multiple used in the analysis was developed using historical analysis of the company's and the peer group's multiples. The table below shows the valuation analysis results.
Valuation | SIRI |
Next Yr Proj EPS | $0.10 |
EPS Growth Rate | 20% |
Future EPS (5 Yr) | $0.17 |
Expected P/E | 20.4 |
Price 5 Yrs Out | $3.51 |
Unlevered Beta | 0.95 |
D/E Ratio | 428% |
Current Tax Rate | 35% |
Levered Beta | 3.59 |
Risk Free Rate | 2% |
Risk Premium | 6.00% |
Size Premium | -0.36% |
Cost of Equity | 23.2% |
Cost of Equity Used | 15.0% |
Fair Value | $1.81 |
Current Price | $2.32 |
% Overvalued | 22% |
As shown in the table above, SIRI currently trades at a significant premium to fair value. I would use the recent strength in stock price (stock up 27% YTD) to sell any existing position in the company. For the adventurous traders, the stock makes a good short candidate.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
