The U.S. second earning season of the calendar year 2018 is reaching climax with more than 35% of the S&P 500 Index companies set to report their first quarter results this week. Yesterday, saw 135 companies announce their earnings with most of them reporting mixed results. The U.S. benchmark bond yield topped 3% for the first time since 2014 resulting in a significant sell-off in the equities market. As such, all the leading indices closed lower yesterday as did most companies despite some of them posting impressive results.
On Wednesday, the earning season continued in the same trend witnessed throughout the week with hundreds of companies reporting their Q1, 2018 earnings. Among them was Sirius XM Holdings Inc. (NASDAQ: SIRI), the world’s largest publicly listed satellite radio company.
The New York-based American broadcasting company provides three satellite radio and online radio services in the U.S. including Sirius Satellite Radio, XM Satellite Radio, and Sirius XM Radio. It also has a minority interest in the Canadian-based namesake, SiriusXM Canada.
Key highlights from the most recent quarter results for Sirius XM Holdings Inc. (NASDAQ: SIRI)
In the most recent quarter ended March 2018, SIRI posted a total revenue of $1.375 billion, which is a significant increment from last year’s figure of $1.294 billion. Of this figure, about $1.117 billion was subscriber revenue while advertising contributed $42 million to the revenue mix. Equipment revenue was $35 million while the rest of the top line totaling $180.8 million came from royalty fee and other income.
On the other hand, the bottom line increased $82 million as net income came in at $289 million compared to $207 million posted the same quarter last year. Dilute EPS of $0.06 per share reflected a 50% increment from last year’s earnings of $0.04 per share.
SIRI impressive performance for the quarter was reflected across several performance metrics including a significant rise in the number of subscribers which pushed its subscriber-base to top 33 million for the first time ever.
The company added 330,000 subs during the quarter, with 207,000 comprising of the net new-pay subscribers, which brought the total for this category to $27.7 million. The company cash reserves also improved significantly after posting an increment of 31% to $327 million in free cash flows while operating cash flow rose by 34% to $415 million.
However, there wasn’t much change in the company’s guidance for the year as it upheld its previous estimates of a revenue forecast of $5.7 billion, which will reflect an increment of about $300 million from last year’s total revenue of about $5.43 billion. This would be a small slowdown in its revenue growth, given the fact SIRI has averaged about $400 million top line growth over the last three years.
The company also maintained its net new-pay additions prediction for the year at 1 million while EBITDA and free cash flows forecast remained unchanged at $2.15 billion and $1.5 billion respectively.
SIRI stock valuation
Share of Siri currently trade at a P/E ratio of about 44.79x, which compared to industry peers is quite high. Its P/E ratio is also significantly above industry average and these metrics imply that the company’s stock might be relatively overvalued.
However, there could be a good reason for this level of pricing. Looking at SIRI’s growth prospects, the company currently enjoys a massive operating margin of about 30%, which trumps the industry average of about 10% several times. Its net margin is also very impressive compared to the industry average and this could be one of the reasons investors are willing to pay a premium on the company’s stock.
Good operating and net margins suggest that the company has the flexibility required to absorb short-term performance shocks while at the same time maintaining a certain level of top line and bottom line growth.
SIRI’s return on invested capital of 16% is also worth noting while its Free Cash Flow margin of 32% is better than what investors would find in most companies operating in the same industry.
Technical Analysis
Shares of SIRI have been on a relatively flat trending zone since the start of the month oscillating between $6.10 and $6.30 per share. In each of the last two pullbacks, SIRI’s stock rebounded just below the MA (50) line, and if this is to be repeated, then another rebound could take place in the next few days. Currently. SIRI stock just dropped below the 50-day moving average line.
The next rebound could push the shares of the company well above the $6.40 market closing to $6.50, while an unexpected continuation of the current pullback could take the stock close to the current support of about $6.10. So, there is a possibility of a +$0.15, -$0.15 in the next few trading sessions.
However, looking at the MACD chart, the momentum just crossed from below and going up, which suggests that the rebound to $6.40/$6.50 is more likely, unless something fundamentally changes the current market sentiment.
Looking forward
Sirius XM’s satellite radio is still among the top in terms of market share. However, with the growing adoption of internet radios and the emergence of Apple Music to add to the already existing rivalry that includes Spotify and Pandora, there is a shift beginning to form overall music streaming industry. SIRI’s internet radio is still gaining traction thanks to its affiliation with the automobile industry.
The company’s slight pullback in stock price Wednesday might as well be due to what caused the massive plunge in stock prices Tuesday and may have nothing to do with its Q1 results. By the look of things, the company did well growing its revenue, EPS, Free Cash Flows, EBITDA and the number of subscribers.
Once investors begin to assess its valuation based on results and not, the overall market sentiment we might see the rebound that appears to be long overdue. The company’s shares have not established a major rally since last year, and this might be an opportune time to do so, as it continues to adapt its business to the changes in consumer behavior.