We closed this position on April 10, 2012. A copy of the associated Position Update report is here.

TheStreet.com recently published three articles quoting me on SIRI. Andrea Tse called and, after reviewing our models on SIRI, I told her that the stock was Dangerous because:

  1. the valuation was too high as the current price predicted the company would grow profits at 15% compounded annually for the next 10 years.
  2. the company was much less profitable than its reported accounting numbers suggested. After accounting for the fact that the company had written off nearly $5bn in assets (after-tax), the profitability of the company is actually quite low.

Here is a copy of our report on SIRI. Page 17 shows the assumptions in the Default scenario of our dynamic DCF model (how it works is explained here). Note that I used my own assumptions in our MaxVal model to derive the “15% growth for 10yrs” results mentioned in #2 above. The differences between my assumptions and our Default assumptions are that I used 15% revenue growth rate rather than the much lower consensus numbers of 12.4% and 7.4% for the next two years and my profit margin forecasts were higher than our Default. Note that the Default assumptions in the DCF for all of our MaxVal models are based on Consensus forecasts where available and historical results. Our goal is never to make any wild forecasts and enter the most reasonable estimates based on the info we have.

For details on the asset-write-offs, see pages 9 and 10. The Cumulative Asset-write-offs for SIRI are $4.86bn since  1998. The reported assets for SIRI as of their last fiscal year are $4.26bn. SIRI’s management has written off more assets than they have on the books now. Not a good sign for management’s ability to allocate capital effectively.

Is it possible that management could turn the business around and blow the lid off profits…sure, anything is possible, but that does not make it a worthwhile bet for your investment dollars. We see many other stocks that offer much more Attractive risk/reward.

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