Wunderlich Securities upgraded shares of Sirius XM Holdings Inc. (SIRI) to a "Buy" from a "Hold" recommendation. The research firm says the satellite radio company's recent selloff created a buying opportunity due to valuation. Wunderlich sees car conversion growth and enhanced products as positives for SIRI; although, they reduced their price target to $4.20 from $4.50.
That's sort of odd, no? A $4.50 target and a hold rating versus a $4.20 target but a buy ranking. iStock will take the $4.50 and be recommendation agnostic. How about you?
Let's take a look at Wall Street's consensus EPS and sales estimates and five-year price-to-earnings (P/E) and price-to-sales (P/S) to see if $4.20-$4.50 is possible in the year to come.
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Before we do, in the event you aren't familiar with Sirius XM, the company provides satellite radio services in the United States and Canada to more than 25 million subscribers. SIRI creates and broadcasts commercial-free music; sports talk and live events; comedy; news; exclusive talk and entertainment; and the comprehensive Latin music, sports, and talk programming in radio.
Moving back to evaluating SIRI, analysts see the NASDAQ 100 member earning $0.12 in 2014, which is 71.42% more than this year's expectation of $0.07. Sirius XM would need a P/E of 35 to reach $4.20 and a price-to-earnings multiple of 37.5 for $4.45; not much of a difference.
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Either way, iStock is OK with a P/E that's less than company's projected EPS growth. Meanwhile, the entertainment company's average P/E during the last half-decade was 32.39, which is close enough to either P/E mentioned in the previous paragraph. At the five-year norm, shares would price out at $3.89 or 12.75% upside as we type.
Based on next year's sales forecast of $4.15 billion, Wunderlich's new price target tra! nslates to a P/S ratio of 6.21 and yesterday's target requires 6.65 times sales. In the last five-years, a P/S ratio above 5 is almost entirely limited to the last 17 months with two brief exceptions in the middle of 2011.
Since 2009, SIRI's has traded from 0.07 to 7.35 times sales. At the moment, investors are willing to pay 6.13 times revenue, which means Wall Street will have to bid SIRI higher to meet Wunderlich price target, past and present.
The key for the broadcaster will be subscription growth and average-revenue-per-user (ARPU). Subscriptions and ARPUs continue to increase; although, quarter-over-quarter growth for both is slowing.
Overall: Sirius XM Holdings Inc. (SIRI) has a chance to hit Wunderlich Securities's price target based on its historic P/E ratio; however, it could be more difficult on a P/S basis, especially if ARPUs and net subscription additions continue to slow.
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