At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
A 40% gain? Can you be Sirius?
On a generally "red" day for the market yesterday, at least investors in Sirius XM Radio
But that's not the best news. The best news is that if B of A is right, Sirius investors have only seen the tip of the iceberg on what profits they can expect. According to B of A, Sirius shares aren't worth just $2.67, as they sell for today. They're worth a whopping $3.75 apiece -- and so could rise a further 40% over the coming year.
Applause all around?
B of A isn't the only analyst making positive noises in this industry. At the same time the banker was talking up Sirius stock, another analyst was arguing that Liberty Interactive
Yet the big question here has to be: If B of A and Topeka are projecting 40% and 30%-ish profits for these two stocks, then why did they rise only 4% and less than 1%, respectively, in response to the new ratings? For the answer, we have to look further afield.
A love affair with the American car
Analysts at StreetInsider.com pointed out yesterday that perhaps the single most important factor affecting sales growth at Sirius (and its rival, Pandora
This being the case, it could be that disappointing sales results from General Motors
Sure, sales were lackluster at Detroit's Big Two. But what carbuyers took away from them, they gaveth to Ford and GM's rivals. Spurred by red-hot interest in its Fiat small cars, sales last month jumped 12% at Chrysler, for example. Meanwhile, Volkswagen sales surged 34%, and Toyota continued its comeback with a 42% leap into September. And of course, all three of these carmakers offer Sirius radio in their automobiles as well.
But what about the price?
So really, there's little reason to worry that a sales slump in Detroit will derail the Sirius success story -- or B of A's buy thesis. But what about the stock price? On the one hand, Sirius's P/E ratio of 4.9 times earnings looks good -- maybe even a bit too good to be true, and that may worry some investors.
But once again, I think there's little to fear here. Sure, Sirius isn't really a 5 P/E stock. Fact is, its actual free cash flow doesn't come close to covering the $3.4 billion in GAAP income that the company reported earning over the past 12 months. But even the $513 million in real cash profits that the company did earn is enough to give Sirius a price-to-free cash flow ratio of 19.8. And if you ask me, that's still plenty cheap for the 25% long-term earnings growth rate that Wall Street has assigned Sirius.
Long story short, Sirius' sales growth looks strong, and its stock price is not expensive. Bank of America is right to recommend buying it -- and if you want even more insight into this remarkable company, you're in luck. We just happen to have prepared a premium research report on Sirius XM here at the Fool. If you're thinking about buying, but still not quite sure what price to pay, read the report and we'll give you our best guess on how Sirius might fly. Just click here to get started.
Fool contributor Rich Smith is neither long nor short any stock named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 274 out of more than 180,000 members.
The Motley Fool owns shares of Bank of America and Ford. Motley Fool newsletter services have recommended buying shares of General Motors and Ford and creating a synthetic long position in Ford. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.