Sirius XM Holdings Stock Is Believed To Be Modestly Undervalued
- By GF Value
The stock of Sirius XM Holdings (NAS:SIRI, 30-year Financials) appears to be modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $6.09 per share and the market cap of $25.2 billion, Sirius XM Holdings stock is estimated to be modestly undervalued. GF Value for Sirius XM Holdings is shown in the chart below.
Because Sirius XM Holdings is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 16.5% over the past three years and is estimated to grow 4.99% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Sirius XM Holdings has a cash-to-debt ratio of 0.01, which ranks in the bottom 10% of the companies in the industry of Media - Diversified. Based on this, GuruFocus ranks Sirius XM Holdings's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of Sirius XM Holdings over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Sirius XM Holdings has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $8 billion and earnings of $0.02 a share. Its operating margin is 23.16%, which ranks better than 91% of the companies in the industry of Media - Diversified. Overall, GuruFocus ranks the profitability of Sirius XM Holdings at 8 out of 10, which indicates strong profitability. This is the revenue and net income of Sirius XM Holdings over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Sirius XM Holdings is 16.5%, which ranks better than 84% of the companies in the industry of Media - Diversified. The 3-year average EBITDA growth rate is -8.2%, which ranks in the middle range of the companies in the industry of Media - Diversified.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Sirius XM Holdings's return on invested capital is 4.70, and its cost of capital is 6.69. The historical ROIC vs WACC comparison of Sirius XM Holdings is shown below:
Overall, the stock of Sirius XM Holdings (NAS:SIRI, 30-year Financials) is believed to be modestly undervalued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in the industry of Media - Diversified. To learn more about Sirius XM Holdings stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.