Sirius XM shares fell by -1.8% during the day's afternoon session, and are now trading at a price of $4.9. Is it time to buy the dip? To better answer that question, it's essential to check if the market is valuing the company's shares fairly in terms of its earnings and equity levels.
Sirius XM Is Overvalued:
Sirius XM Holdings Inc. operates as an audio entertainment company in North America. The company belongs to the Consumer Discretionary sector, which has an average price to earnings (P/E) ratio of 22.96. In contrast, Sirius XM has a trailing 12 month P/E ratio of 15.3 based on its earnings per share of $0.32.
There is an important limit on the usefulness of P/E ratios. Since the P/E ratio is the share price divided by earnings per share, the ratio is determined partially by market sentiment on the stock. Sometimes a negative sentiment translates to a lower market price and therefore a lower P/E ratio -- and there might be good reasons for this negative sentiment.
One of the main reasons not to blindly invest in a company with a low P/E ratio is that it might have low growth expectations. Low growth correlates with low stock performance, so it's useful to factor growth into the valuation process. One of the easiest ways to do this is to divide the company's P/E ratio by its expected growth rate, which results in the price to earnings growth, or PEG ratio.
Sirius XM's PEG ratio is 2.38, which shows that the stock is overvalued in terms of its estimated growth. For reference, a PEG ratio near or below 1 is a potential signal that a company is undervalued.
EPS Trend Sustained Primarily by Reducing the Number of Shares Outstanding:
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $5,771 | $7,794 | $8,040 | $8,696 | $9,003 | $8,949 |
| Revenue Growth | n/a | 35.05% | 3.16% | 8.16% | 3.53% | -0.6% |
| Operating Margins | 30% | 21% | 11% | 23% | 23% | 23% |
| Net Margins | 20% | 12% | 2% | 15% | 13% | 14% |
| Net Income (MM) | $1,176 | $914 | $131 | $1,314 | $1,213 | $1,271 |
| Net Interest Expense (MM) | $350 | $390 | $394 | $415 | $422 | $428 |
| Depreciation & Amort. (MM) | $301 | $468 | $506 | $533 | $536 | $537 |
| Earnings Per Share | $0.26 | $0.2 | $0.03 | $0.32 | $0.31 | $0.33 |
| EPS Growth | n/a | -23.08% | -85.0% | 966.67% | -3.13% | 6.45% |
| Diluted Shares (MM) | 4,561 | 4,616 | 4,429 | 4,143 | 3,990 | 3,865 |
| Free Cash Flow (MM) | $1,525 | $1,654 | $1,668 | $1,610 | $1,550 | $1,288 |
| Capital Expenditures (MM) | $355 | $363 | $350 | $388 | $426 | $667 |
| Current Ratio | 0.17 | 0.3 | 0.31 | 0.4 | 0.35 | 0.33 |
| Total Debt (MM) | $6,888 | $7,844 | $8,500 | $8,832 | $9,452 | $8,823 |
| Net Debt / EBITDA | 3.37 | 3.66 | 6.18 | 3.39 | 3.65 | 3.43 |
Sirius XM has rapidly growing revenues and increasing reinvestment in the business, wider gross margins than its peer group, and strong operating margins with a stable trend. However, the firm suffers from EPS growth achieved by reducing the number of outstanding shares and not enough current assets to cover current liabilities because its current ratio is 0.33. Finally, we note that Sirius XM has positive cash flows and significant leverage levels.
