Sirius XM Stock: Negative Factors Make It Unattractive

Sirius XM Holdings (SIRI) is a radio company, which provides satellite radio services on a subscription fee basis. The company offers music, sports, entertainment, comedy, talk, news, traffic, and weather channels, as well as infotainment services. Its brand channels include SiriusXM Traffic, SiriusXM Travel Link, NavTraffic, NavWeather, SiriusXM Aviation, and SiriusXM Marine.

I am bearish on SIRI stock. There are several key risks and at least five severe warnings that make the stock very risky now. On top of these factors, there is a hard-to-ignore red flag that has to do with book value.

Sirius XM Third-Quarter 2021 Financial Results

Is a beat on EPS and revenue enough to move stocks upon their release? In most cases, these are fundamental catalysts, and in theory, any positive surprise should be a bull case for a stock. SIRI stock closed 2% higher on October 28, 2021, the date the company released its third-quarter 2021 financial results. There was a beat on EPS and revenue.

GAAP EPS of $0.08 was a beat by $0.01, and revenue of $2.2 billion was a beat by ~$31 million. SIRI stock earnings have been mixed with both positive and negative surprises in the past eight consecutive quarters. In six out of these eight quarters, there has been a positive surprise.

The stock price has been relatively static for months now. Is there a reason for this stagnant stock price? I argue that there are at least five key reasons that are negative for SIRI stock. Investors seem to have noticed most of these risks as there is a loss of enthusiasm and momentum for the stock. It hardly moves now.

SIRI Stock: Five Severe Warning Signs

The firm has been issuing new debt. Over the past three years, it issued $1.7 billion of debt. This raises a lot of concerns that have to do with its level of equity, which I will mention in detail.

Gross and operating margins have been declining over the past three consecutive years. Gross margins were 53% in 2018 and are now 50.7% in the last 12 months. During the same period, operating margins dropped from 31.2% to 23.6%. SIRI’s net margin has also been in a declining trend.

In 2018, 2019 and 2020, the net margin for Sirius XM was 20.4%, 11.7% and 1.6% respectively. Net margin has rebounded to 3.7% on a TTM basis.

Sirius XM Holdings displays poor financial strength caused by too much debt for the company. This is supported by the Altman Z-score of 1.8, which places it in a distress zone. This implies bankruptcy possibility in the next two years.

The company’s liquidity position is not great as the current ratio, and the quick ratio is well below the 1.0 level. As per the latest quarter, the current ratio was 0.4, and the quick ratio was 0.3.

Referring again to the equity part of the balance sheet, Sirius XM has a negative book value per share due to negative total equity. As of the most recent quarter, the company had an equity deficit of ~$2.56 billion.

It can be argued that Sirius XM has a lot of intangible assets, net goodwill, and net other intangibles on its balance sheet that perhaps understate their true value. However, the book value of equity per share, in essence, indicates a firm’s net asset on a per-share basis. This is not a good sign when it is negative – not from a valuation perspective.

In theory, if Sirius XM was liquidated, the shareholders would not get a positive amount as the assets would be less than enough to cover all the liabilities.

On the valuation analysis again, SIRI stock is relatively overvalued based on its P/E ratio of 82.6x compared to the U.S. media industry average of 12.7x.

Wall Street’s Take

Turning to Wall Street, Sirius XM Holdings has a Hold consensus rating based on three Buys, three Holds, and two Sell ratings assigned in the past three months. The average Sirius XM Holdings price target of $7.19 represents a 16.7% upside potential.

Conclusion

Sirius XM Holdings has several key risks that make it unattractive in 2022. The main red flag is the negative book value per share. Declining profitability is not supportive for the stock either.

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