On Wednesday, Pivotal Research raised its rating on Sirius XM Radio (NASDAQ:SIRI) from Hold to Buy, adjusting the price target to $4.90 from $5.05. The firm's decision reflects a positive view on the company's financial prospects, particularly its ability to generate free cash flow.
Pivotal Research outlined that Sirius XM's business model, centered around its in-car services, possesses a "decent moat" and is expected to exhibit stable to modestly increasing revenue and EBITDA.
The analyst noted the high conversion rate of EBITDA to free cash flow, which is anticipated to become more evident as temporary capital expenditures subside. The year 2024 is projected to be the peak for capital expenditures, totaling $700 million, with a significant reduction to approximately $300 million by 2027.
The research firm anticipates that Sirius XM's stock will stabilize around its current levels, and with the expected deal closure in July, investors should gain confidence in the company's cash flow growth for 2025. The inclusion of Sirius XM in additional indexes is also expected to attract institutional interest post-deal closure, and the stock's valuation at 7 times the projected 2025 free cash flow is seen as attractive.
Furthermore, Pivotal Research highlighted that it does not account for the potential long-term benefits that could arise from the sale of Sirius XM's C-band spectrum to terrestrial wireless operators, which could be significantly valuable based on historical spectrum transactions.
The firm employs a discounted cash flow (DCF) methodology with an 8% discount rate and a 9 times EBITDA multiple to value Sirius XM. At the target price, the stock would trade at 10.75 times the forecasted 2025 free cash flow.
InvestingPro Insights
As Pivotal Research turns bullish on Sirius XM Radio, with a new Buy rating and a price target of $4.90, real-time data and InvestingPro Tips provide additional context for investors. The company's current Market Cap stands at $12.15 billion, and it trades with a P/E Ratio of 9.77, reflecting a valuation that is high relative to near-term earnings growth. This aligns with Pivotal Research's view on the stock's valuation being attractive at 7 times the projected 2025 free cash flow.
InvestingPro Tips indicate that Sirius XM has maintained dividend payments for 9 consecutive years, with a current Dividend Yield of 3.37%. This consistent return to shareholders may appeal to income-focused investors. Additionally, the company is trading near its 52-week low, with the price having fallen significantly over the last three months, as shown by a 41.39% negative return over the period. This could present a buying opportunity for value investors, especially considering analysts predict the company will be profitable this year, and it has been profitable over the last twelve months.
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