August 5, 2010 (7:48 pm)
Spencer Osborne
The analyst reports have come in at a fast and furious pace today, and we have condensed the information into a one post round-up. Most analysts were positive on the call. Some upgraded sentiment, others price, and some maintained their current stances.
BGB Securities – Murray Arenson
BGB analyst Murray Arenson updated his model, and went through the trouble of building an additional three distinct models for Sirius XM going forward. The result was a MAINTAIN on their current price target of $1.35.
FORECAST AND BALANCE SHEET UPDATE
We have updated our forecast, which was already higher than the company’s previous guidance. Our new projections are adjusted marginally, still higher than the guidance but to a lesser degree. Our new forecast calls for revenue of $2.84 billion in reve-nue, $602 million in adjusted EBITDA, and $161 million in FCF. Our previous forecast called for $2.83 billion, $610 million, and $145 million respectively. We are assuming 11.5 million in auto sales for the year. During the quarter, Sirius called its $114 million of XM 10% Senior PIK Notes. Long-term debt is now $2.7 billion (leverage ratio down to 4.6x), with only $230 million due between now and 2013 when approximately $1.8 billion matures.
VALUATION
In terms of multiples, shares of SIRI are currently trading at an enterprise value of 15.4x our FY10E EBITDA, and 14.2x our FY11E EBITDA. However, Sirius also has approximately $8 billion in net operating losses. When we subtract the value of the tax shield from the current enterprise value, we see shares of SIRI trading at multiples of 12.1x and 11.1x our respective EBITDA forecasts for FY10 and FY11. We looked at Sirius’s valuation on a per subscriber basis, taking into account the SAC necessary to maintain long-term growth. We also incorporate the value of the company’s net operating loss carryforwards (after looking at free cash flow on a fully taxed basis). We apply a value of $440 per subscriber and arrive at an implied price in line with our $1.35 target.
Janco Partners – Martin Pyykkonen
The analyst reiterated their buy and $1.40 Price Target. Their target as based on 14x their 2011 EBITDA estimate of $646 million their model includes a 6.4 billion diluted share count to reflect Liberty Media’s stake in SIRI. The analyst sees 2010 EBITDA at $585 million EBITDA for full year.
Janco noted strong strong execution in 2Q10 stating that SIRI’s 2Q10 results were largely driven by the company’s fundamental execution in generating subscriber growth, tightly managing operating expenses and further delivering on merger benefits vis a vis XM – all against the backdrop of a tepid economic recovery at best.
JP Morgan – Lev Polinsky, CFA
JP Morgan remains NEUTRAL on Sirius XM. Polinsky notes that Sirius XM reported 2Q results ahead of expectations and that the company appears to be executing well on all aspects of the story. The main question in Polinsky’s is the equity valuation, and therefore they reiterate neutral.
JP Morgan is raising full-year estimates. They now expect F’10 EBITDA of $610M, up 32% Y/Y and ahead of the company’s $575M guidance, which they view as conservative. JP Morgan expects SIRI to add nearly 1.3M
subscribers in 2010, and surpass the 20M subscriber mark by year-end.
RBC Capital – David Bank
The analyst rates SIRI as SECTOR PERFORM with a $1.00 price target. Bank feels that the Q2 results met with his expectations. The main concerns for Bank are tied to valuation. They note the continued solid execution, but valuation keeps them on the sideline.
“improving environment for auto sales continues to drive top-line performance while churn and conversion rates are holding steady despite higher gross additions. Near-term, profitability should lag due to SAC ramp ahead of gross additions, but that will likely “even out” over time. “2.0″ product initiatives could alleviate some longer-term competitive landscape concerns we have, but we await further clarity on what 2.0 will actually be. At the end of the day, a 15x+ 2010E EV/EBITDA multiple leaves limited room for upside relative to media peer universe.”
Barrington – James Goss CFA
Goss maintains an OUTPERFORM rating and a price target of $1.25. To Goss it seems clear that whatever level is achieved by SIRI, the EBITDA generation is unlikely to be significantly impacted over the balance of 2010. In fact, if sub count growth in the final months of 2010 is very strong, associated SAC costs will likely pose a challenge to EBITDA levels. Management further noted that the process of automotive manufacturers rebuilding their auto fleets could cause
overall SAC costs to rise in the second half.
Lazard Capital – Barton Crockett
Lazard has a BUY rating on Sirius XM with a target price of $1.35. Crockett noted that Sirius XM upped 2010 revenue guidance, saying that it will “approach” $2.8B, versus former guidance for “approximately” $2.75B. Free cash flow guidance was upped to “approach” $150M vs. former guidance to “exceed” $100M. Adj. EBITDA guidance for approximately $575M was unchanged. This might mark the only pushback on the report – hiked revenue guidance, but no change to adj. EBITDA, and is why we give the report an A- instead of an A+.
Downside risk according to Lazard is slowing car sales and Internet Radio competition.
Morgan Stanley – David Gober CFA
No change in rating from Gober. After completing the Sirius/ XM merger, a refinancing of its balance sheet, and weathering the recent recession, Sirius XM has emerged as a more stable company with several key opportunities. However, the company will likely continue to experience volatility in its share price as its ultimate free cash flow outlook becomes clearer. We remain Not-Rated as we
believe that equity values will continue to be highly volatile due to relatively high leverage and still relatively small free cash flow.
Miller Tabak – David Joyce
Joyce caries a BUY rating on Sirius XM with a Short Term Target of $1.25, and a Long Term target of $1.45.
The company had previously increased its net subscriber addition guidance for 2010 to +1.1 mm (Tabak is at +1.184 mm, back-half weighted), but SIRI is increasing financial guidance now closer to their estimates: revenue should approach $2.8 bn of revenue, up from $2.7 bn (Tabak is at $2.800 bn), and $575 mm of adjusted income from operations, up from $550 mm (Tabak is at $584 mm of ‘10E OIBDA).
Liberty Media (LINTA) will host their Q2 conference call at 9:30 AM EST. Liberty controls a 40% stake in Sirius XM via preferred shares in its tracking stock LCAPA. The company has a contract in place which prevents them from taking a position in Sirius XM larger than 49.9% until next spring. After that, the company can make a tender offer for Sirius XM.
This year, while the debate rages on about whether the auto channel is recovering, one thing is clear. The car companies that offer incentives to consumers are managing better comparisons than those that aren’t. August looks to be a good month for incentives once again as automakers are trying to make some room for the new model year. These incentives should be enough to deliver an August with over 1 million in sales. For Sirius XM investors, this is great news. July’s 1.05 million is in the bag, and a repeat of that in August sets up a third quarter that can deliver a lot of gross subscribers to the table for Sirius XM.
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