Is There a Chance in Sirius XM Holdings Inc.’s 29% Undervaluation (NASDAQ: SIRI)?

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<p class = "Canvas-Atom Canvas-Text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "How far is Sirius XM Holdings Inc. (NASDAQ: SIRI) of its intrinsic value? Using the latest financial data, we check whether the stock has a reasonable price by discounting the expected future cash flows to their present value. I will use the Discounted Cash Flow (DCF) model. It may sound complicated, but it’s actually quite simple! “Data-reactid =” 27 “> How far is Sirius XM Holdings Inc. (NASDAQ: SIRI) from its intrinsic value? Use the latest financial data See if the price of the stock is reasonable by doing the expected Discount future cash flows to their present value. I’ll use the discounted cash flow model (DCF). It may sound complicated, but it’s actually quite simple.

<p class = "canvas-atom canvas-text MB (1.0em) MB (0) – SM MB (0.8em) – SM" type = "text" content = "However, note that there are many ways to appreciate The The value of a company and a DCF are just one method. If you want to know more about the discounted cash flow, you can read the reasons for this calculation in detail in the Simply Wall St analysis model, “data-reactid =” 28 “> However, keep in mind that there are many ways to appreciate a company’s value, and a DCF is just one method, and if you want to learn more about discounted cash flow, you can understand why Specify the calculation Read the details in the Simply Wall St analysis model.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = " Check out our latest analysis for Sirius XM Holdings “data-reactid =” 29 “> Check out our latest analysis for Sirius XM Holdings

The calculation

We use a so-called 2-step model, which simply means that we have two different growth periods for the company’s cash flows. Generally, the first stage is a higher growth and the second stage is a lower growth phase. First, we need to get estimates of the cash flows over the next ten years. Wherever possible, we use analyst estimates. However, if these are not available, we extrapolate the previous free cash flow (FCF) from the most recent estimate or the most recently reported value. We expect companies with shrinking free cash flow to slow down their rate of shrinkage and that companies with growing free cash flow will slow down their growth rate during this period. We do this to take into account that growth tends to slow down more in the early years than in later years.

A DCF is all about the idea that a dollar is worth less in the future than a dollar today. Therefore, we discount the value of these future cash flows to the estimated value in today’s dollars:

10-year free cash flow (FCF) forecast

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
FCF Leverage ($ million) $ 1.80 billion $ 1.89 billion $ 1.92 billion $ 1.96 billion $ 2.37 billion $ 2.50 billion $ 2.62 billion $ 2.71 billion $ 2.79 billion $ 2.87 billion
Growth rate Estimated source Analyst x8 Analyst x9 Analyst x6 Analyst x5 Analyst x2 Est @ 5.63% Est @ 4.46% Est @ 3.64% Est @ 3.07% Est @ 2.67%
Present value ($. Million) reduced by 7.0% $ 1.7 thousand $ 1.7 thousand $ 1.6 thousand $ 1.5,000 $ 1.7 thousand $ 1.7 thousand $ 1.6 thousand $ 1.6 thousand $ 1.5,000 $ 1.5,000

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = US $ 16b “data-reactid =” 36 “>(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = $ 16 billion

After calculating the present value of future cash flows in the first 10-year period, we have to calculate the final value, which takes into account all future cash flows after the first stage. A very conservative growth rate is used for several reasons, which a country’s GDP growth cannot exceed. In this case, we used the interest rate on 10-year government bonds (1.7%) to estimate future growth. Just as in the 10-year growth period, the future cash flows are discounted to their current value with an equity cost rate of 7.0%.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Terminal value (TV)= FCF2029 × (1 + g) ≤ (r – g) = 2.9 b USD × (1 + 1.7%) ≤ 7.0% – 1.7%) = 56 b USD data-reactid = 38Terminal value (TV)= FCF2029 × (1 + g) ÷ (r – g) = 2.9 b USD × (1 + 1.7%) ÷ 7.0% – 1.7%) = 56 b USD

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Present value of the final value (PVTV)= TV / (1 + r)10= $ 56 billion (1 + 7.0%)10= US $ 29b “data-reactid =” 39 “>Present value of the final value (PVTV)= TV / (1 + r)10= $ 56 billion (1 + 7.0%)10= $ 29 billion

The total or equity value is then the sum of the present value of future cash flows, which in this case is $ 45 billion. The final step is to divide the equity value by the number of shares issued. Compared to the current share price of $ 7.1, the company appears undervalued at a discount of 29% compared to the current share price. However, keep in mind that this is only an approximate estimate and like any complex formula garbage in, garbage out.

NasdaqGS: SIRI Intrinsic Value, January 15, 2020

NasdaqGS: SIRI Intrinsic Value, January 15, 2020

The assumptions

We would like to point out that the most important input factors for a discounted cash flow are the discount rate and of course the actual cash flows. Investing also includes evaluating a company’s future performance itself. So try the calculation yourself and check your own assumptions. The DCF also does not take into account the potential cyclicality of an industry or the future capital requirements of a company and therefore does not provide a complete overview of a company’s potential performance. Given that we consider Sirius XM Holdings to be potential shareholders, the cost of equity is used as the discount rate, not the cost of capital (or weighted average cost of capital, WACC) that make up debt. We used 7.0% in this calculation, based on a debt of 0.995 in debt. Beta is a measure of the volatility of a share compared to the overall market. We get our beta from the industry-standard beta of globally comparable companies with a defined limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

While this is important, DCF calculation shouldn’t be the only metric you look out for when researching a business. The DCF model is not a perfect tool for stock valuation. Rather, it should serve as a guide to “What assumptions must be made for this stock to be under or overvalued?” If a company grows at a different growth rate or if the cost of equity or risk-free interest rates changes significantly, the output can look very different. What is the reason why the stock price differs from the intrinsic value? For Sirius XM Holdings there are three important aspects that you should consider:

  1. Financial health: Does SIRI have a healthy balance sheet? Check out our free balance sheet analysis with six simple reviews of key factors such as leverage and risk.
  2. Future result: What is the growth rate of SIRI compared to its competitors and the broader market? Find out more about analyst consensus numbers for the coming years by accessing our free graph of analyst growth expectations.
  3. Other high quality alternatives: Are there any other high quality stocks you could hold instead of SIRI? Check out our interactive list of high quality stocks to get an idea of ​​what else is missing!

<p class = "canvas-atom canvas-text MB (1.0em) MB (0) – SM MB (0.8em) – SM" type = "text" content = "PS. Simply Wall St updates its DCF calculation for each US stock every day, so if you just want to find the intrinsic value of another stock Search here, “data-reactid =” 65 “> PS. Simply Wall St updates its DCF calculation for each US stock daily, so if you want to find the intrinsic value of another stock, just search here.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com, This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading.“data-reactid =” 66 “>If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com. This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading.

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