Investors in Sirius XM have been waiting for good news from the analysts, and it appears that at least some firms have faith that satellite radio will prosper in the weeks and months ahead. Barrington Research has upgraded SIRI to Outperform with a $0.70 price target.
In a note issued today, Barrington highlights that the woes of the merger process and credit market took their toll on the equity, but that things are beginning to change, and that perhaps brighter days are ahead for satellite radio investors.
Barrington believes that investors should consider several core fundamental issues:
- A favorable swing in EBITDA of more than $500 million into positive territory this year should be followed by substantial, additional annual gains.
- Added revenue sources, especially a royalty recovery fee with broad application, should boost revenues.
- Cost cuts have been achieved across a broad swath of line items, with more to come.
- Top line opportunities have been a focus as well, despite the challenge imposed by a merger agreement that included no increase to the base subscription rate for three years.
- Sirius XM has added charges for the previously complimentary Internet service and it increased its price for additional subscriptions under the family plan.
"Now it appears there will be an added fee below the line labeled a Royalty Recovery fee permitted under terms of the FCC agreement to reflect both the higher level of royalty rates now in effect, as well as a catch-up of rate increases since the date the merger was announced. This particular fee is likely to provide meaningful additional dollars, though the phase-in will take several quarters. New initiatives like the iPhone App are being very well received. However, the revenue opportunity may be less important than the attention and added visibility it has provided to Sirius XM and the greater usage of the service it could spur."
Barrington calculates what could be significant upside from current levels to $0.70 (post dilution), based on 2010 estimates and to $1.30 based on 2011 estimates. Given this upside, they now rate SIRI as an OUTPERFORM.
Position: Long Sirius XM Radio, No Position Apple.