Please ensure Javascript is enabled for purposes of website accessibility

This Just In: BMO Turns Bullish on Sirius XM Holdings

By Rich Smith - Jan 15, 2016 at 11:41AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

When a poor analyst stumbles across a great bargain, what should you do?

A little over a week ago, Sirius XM Holdings (SIRI 0.61%) announced that 2015 subscriber additions had topped previous forecasts. This week, Sirius is getting its reward in the form of an analyst upgrade.

The news
Sirius ended calendar year 2015 with 29.6 million subscribers in its pocket. The year saw 2.3 million people sign up for the service, 300,000 more than the company had previously projected.

Additionally, Sirius issued new guidance for fiscal 2016, predicting it will add 1.4 million subscribers in the New Year, collect roughly $4.9 billion in revenue, and generate $1.78 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) -- and $1.4 billion in free cash flow.

The ugrade
And what is Wall Street's reaction to this news? In a word: Relief. This morning, analysts at Canadian banker BMO Capital announced they're pulling their underperform rating on the stock, and upgrading to a more muted market perform recommendation.

Details on BMO's specific reasons for upgrading Sirius are hard to come by right now, but most media outlets covering Sirius seem to be focusing on (a) Sirius' ability to translate 2015's huge boom in auto sales into more subscriptions to its satellite radio service, and (b) "valuation."

And yet, didn't we just read that Sirius is now one of the most shorted stocks on the Nasdaq? And doesn't that imply that Sirius stock is actually overvalued, and not ripe for an upgrade based on valuation?

Let's go to the tape
Seeing Sirius simultaneously ranked as one of the nation's most shorted stocks, and also the one being upgraded by BMO Capital, probably shouldn't surprise us. On Motley Fool CAPS, you see, we've been watching BMO's performance as a stock picker for some years now -- all the way since 2006 in fact.

What we've learned over this time is that while BMO Capital is far from the worst stock picker on Wall Street (its accuracy rating of 46% is actually kind of average), neither is it infallible. In fact, thanks to some pretty incredibly boneheaded calls dragging its score down, BMO currently ranks in the bottom 20% of analysts we track, with its average recommendation underperforming the S&P 500 by more than three full percentage points.

A few notable blunders:

Company

 

BMO Said:

CAPS Says:

BMO's Picks Lagging S&P By:

lululemon athletica

Underperform

***

691 points

Biogen

Underperform

*****

568 points

Valero

Underperform

****

186 points

The question today, of course, is whether Sirius is going to turn out to be another of those incredible blunders (incredi-blunders?) Or will it be one of the 46% of stock picks that BMO makes that actually turn out kind of well?

Valuing Sirius XM Holdings
Call me a traditionalist, but I'll take my cues on this question from the "valuation" of Sirius stock that has BMO so intrigued. Priced at $3 and change today, Sirius shares sell for roughly 41 times net income -- but only 16.6 times free cash flow. S&P Capital IQ data indicate that analysts see Sirius growing profits about 22% annually over the next five years. Valued on GAAP earnings, this makes Sirius shares look pretty expensive, I'll grant you. But valued on free cash flow?

Valued on FCF, Sirius almost looks like a bargain.

Now admittedly, if you factor in debt (as you should) the valuation picture shifts somewhat. But even so, it leaves Sirius selling for the not unreasonable-sounding "enterprise" valuation of just 21.6 times free cash flow. That doesn't sound expensive for a 22% grower. Sirius may not be not the biggest bargain on the planet, but it honestly looks reasonably priced, and even a bit cheap, if the company manages to prove the analysts right about its growth rate. (Hint: Last quarter, Sirius hit 22% on the head, growing GAAP profits by almost exactly that percentage).

Long story short, while I cannot say that I'm thrilled with BMO Capital's record of picking winners in the past, I do agree that they're calling it right on Sirius XM Holdings today. Top dog in its industry, and selling for an attractive price today, Sirius was due for an upgrade -- and may even be a buy.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 255 out of more than 75,000 rated members.

The Motley Fool recommends Biogen. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Sirius XM Holdings Inc. Stock Quote
Sirius XM Holdings Inc.
SIRI
$6.62 (0.61%) $0.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.