I typically don’t like giving out price targets for companies I cover. The main reason is that there are an ungodly amount of click bait pump videos/posts out there that say something like $SIRC PRICE TARGET $25 IN 12 MONTHS GUARANTEED TO THE MOON.
Price targets are a tricky thing. They have so much nuance and assumption involved in them that I find it hard to believe that anyone knows for sure where a share price is going.
Because of all of the nonsense out there, I wanted to get an article out there going through how I think about a long-term price target for $SIRC. So, for the first time ever, I’ll release a ballpark range of where I think $SIRC’s 10-year price target could be. I’ll go through my process and give you some tools on how to think about developing your own long term price target.
Just so we’re not in click bait territory, the range of share prices I’m estimating right now is:
- Low: $1.49
- Medium: $2.52
- High: $4.00
Remember, none of this is guaranteed. So my low of 1.49 is not the lowest it could ever be in 10 years. The company could go bankrupt. Same with the high price – it could be way higher than that. But based on my research so far and the model I’ll get into, this is the rough range of prices per share I see as possible in my opinion.
Now, let’s get started!
Since I haven’t written out my full guide yet (see the top navigation bar), I’ll have to give an extremely abridged account here.
For most microcaps, I swear by a multiples-based model. This means we look at what multiples current mature companies are trading at and apply that multiple to our company’s future forecast financials. These multiples could be something like price / earnings, price / book, EV / EBITDA, etc.
The absolute most simple and straightforward method (assuming there’s no wild capital structure) is a price to earnings ratio, or P/E. Basically, the market capitalization divided by the net income for a company in the trailing 12-month period.
While it’s quite simple as you only need three pieces of information: net income, diluted outstanding shares, and your earnings multiple, you still need to iron out some very key assumptions. Also, in my case, I only value companies over a 10-year time horizon at a minimum. So these assumptions can be incredibly subjective.
In this case, we’ll do roughly 10-11 years by forecasting out to FY 2032.
Now, for $SIRC, let’s discuss some assumptions and then we can move into our modeling exercise.
A note of caution, I am going to keep a lot of this conservative versus what many investors think. I tend to do this. If an investment makes sense with me being conservative, then it makes me personally much more comfortable!
To arrive at our key three pieces of data in FY 2032 years (net income, diluted outstanding shares, and earnings multiple), we have to consider various points. I’ll get into these below.
When we think about net income about 10 years from now, we really just need two points of data: revenue and some profit margin.
For revenue, we have to look at our revenue today and think about where the company could be in FY 2032. That seems pretty daunting, right? Who knows how much money the company will be earning by then?!
For this, we have to make some assumptions. Let’s start with something easier… what do we think FY 2022 revenue will be (remember, the new fiscal year ends 12/31/2022)? We know SIRC’s annual run rate has exceeded 200m based on press releases from the company. But that is backwards looking somewhat and doesn’t include more expansion in FY 2022.
Let’s break it down then. The three months ended 11/30/2021 had revenues of about 48m. So, let’s say the 3 months ended 3/31/2022 will grow by about 30% to 62.4m. Now, if we extrapolate 62.4m into twelve months, and factor in 15% growth on top of that, we land at about 287m.
287m is now our base revenue for the first year of analysis.
Now we need growth rates to FY 2032. For my sensitivity analysis, let’s keep it simple and say on the low end they hit 12.5% growth annually, medium is 15.0%, and high is 17.5%. This includes any new acquisitions they make over time. It’s fairly conservative given recent revenue growth, but at some point the company will likely mature and settle into a more steady growth rate.
Now, onto profit margin. Profit margin is something I beat to death in another article linked here. I am going to use a range of profitability’s roughly about what I outlined in that article. On the low end I’ll assume a net margin of 7.5%, medium of 10.0%, and high of 12.5%.
Now, let’s recap my assumptions for arriving at our net income:
- Revenue Growth: 12.5%
- Net Margin: 7.5%
- Revenue Growth: 15.0%
- Net Margin: 10.0%
- Revenue Growth: 17.5%
- Net Margin: 12.5%
Diluted Outstanding Shares
This is a fairly difficult one to forecast, but we have to try and guess how many outstanding common shares there will be in 10 years. I estimate that the fully diluted share count right now is somewhere around 600m. That includes all outstanding convertible debt converts and all of Series B preferred shares being converted. Again, very rough estimate.
This is a bit of a tough one that doesn’t make that much of a difference in the end. So I assumed the following growth in outstanding shares:
- FY 2022 – 15%
- FY 2023 – 10%
- FY 2024 – 2%
- FY 2025 and onward: 1%
The general idea is that there could be more dilution the next two years as the business ramps up. After that, almost all financing will be via debt.
This is also a tricky one. For this, we need to think about what similar P/E ratios companies that operate like SIRC trade at. If we think about the SP 500 as a proxy, the index as a whole tends to (over longer periods of time) trade somewhere around 15-25x its earnings.
In ten years, assuming SIRC is quite successful and achieving a strong 15% growth rate over time, I have assumed that it will be trading at 18x its net earnings. That’s likely a bit conservative given some of the wild multiples we see in the SP 500, but I like to keep it conservative 😊.
Now, the moment we’ve all been waiting for, let’s see the models!
What does this model tell us? Over a ten-year period, assuming consistent growth and continued success, the share price is going to go up regardless of which scenario was most correct. Captain Obvious over here!!
If we assume a current share price of 0.35 per share, we get the following returns:
- Total Return: 324%
- Annualized Return: 14.0%
- Total Return: 620%
- Annualized Return: 19.6%
- Total Return: 1,041.5%
- Annualized Return: 24.7%
If we compare to a required rate of return for an investment like SIRC we can glean more from this. For a risky microcap like SIRC, I usually like to apply a 20% required rate of return on my investment. If my models don’t forecast a return of 20% for the risk I am taking, I typically tend to pass. I want to earn significantly more than the SP 500, which usually returns something like 10% nominally.
Based on my scenarios, both the medium and high scenarios roughly equal or exceed my required rate of return. So that’s great news for someone like me who is currently thinking about buying.
So this all seems great right, we’re all going to make a ton of money! Well let’s hold our horses here…
Remember, the reason we are expecting to earn a higher rate of return is because this is inherently quite a risky investment. I personally am quite confident in the company to succeed and maybe even exceed my range of potential share prices above. But you cannot have upside without downside, so this is by no means a guaranteed thing. If you want guaranteed, go buy treasury bonds.
Second, this is obviously incredibly assumptions heavy. If you start tweaking my inputs, you’ll get some pretty different answers. I provided a range to try to account for that, but it doesn’t capture some more drastic differences. So please, bear that in mind and only use assumptions you’re comfortable with.
All in all, I hope this modeling exercise was interesting to you and will help any investors determine their own long term price targets.
For me, I am fairly comfortable (using data currently available) with my range of share price outcomes in ten years. The company may go bust or not reach expectations. But at the end of the day, I used some relatively conservative expectations and still landed at a strong risk adjusted forecast return. That for me is personally enough to be confident in an investment in SIRC.
For now, I must wait on the sidelines to invest as I do not have the cash on hand right now (I’ve just entered the real estate business). But as I build cash back up, SIRC is at the top of my list to invest in!
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DISCLAIMER – AT THE TIME OF WRITING THIS ARTICLE I DO NOT HAVE A POSITION IN $SIRC. THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. I AM NOT A FINANCIAL ADVISOR. AT THE TIME OF WRITING THIS ARTICLE, PERSONS AFFILIATED WITH THE COMPANY ANALYZED ABOVE MAY BE PROVIDING MONETARY COMPENSATION AS MONTHLY PATRONS THROUGH MY PATREON. THIS COMPENSATION IS NOT PROVIDED IN RETURN FOR ANY SERVICE, WRITING ABOUT A PARTICULAR TOPIC, AND/OR FAVORABLE OR UNFAVORABLE OPINIONS. MY PATREON SUPPORTERS HAVE NO INFLUENCE ON THE CONTENT OF MY ARTICLES.