If the satellite radio company can’t generate as much cash as it promised, is its stock still a buy?
Sirius XM Holdings (SIRI) stock had tumbled by 7.2% as of 10:15 a.m. ET Tuesday after the company updated investors on its financial projections.
On Tuesday morning, management announced that Sirius had completed its merger with Liberty Media’s Sirius XM tracking stock in a much-anticipated reverse stock split. It boasted that its new and improved “simplified capital structure” gives it a “clear path forward.” Unfortunately, Wall Street decided the path for Sirius’s stock price was down.
What Sirius promised investors
Is that fair? Consider the guidance numbers Sirius rolled out Tuesday:
- Revenue for fiscal 2024 will be approximately $8.75 billion, unchanged from prior estimates.
- Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) should be about $2.7 billion — also in line with prior expectations.
- Best of all, Sirius says it will generate approximately $1 billion in free cash flow this year.
So far, so good, except… Wait. What? Turns out, that right there appears to be the reason that Sirius stock is tumbling.
Five months ago, when giving guidance for 2024 as part of its first-quarter report, Sirius XM told investors to expect $8.75 billion in sales, $2.7 billion in EBITDA… and $1.2 billion in free cash flow. So the big reveal Tuesday morning wasn’t so much that Sirius had completed its merger, or that most of its guidance was unchanged, but rather that there was one big change in the guidance: Sirius will generate $200 million less cash this year than it previously promised.
Is Sirius stock a buy?
With the company now boasting a market cap of just under $10 billion and generating $1 billion a year in free cash flow (and pegged by investors for about a 10% long-term annualized earnings growth rate), the stock looks fairly valued. In that light, Tuesday’s sell-off in Sirius stock may actually be giving investors a buying opportunity.
Factor in management’s promise to continue dividend payments at about 4.3% annually and to buy back $1.2 billion in stock, and the case for buying Sirius stock is only getting stronger.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.