More BUNK from David Bank

I can't wait to see what our buddy Roadkill has to say about this! :)

In a research note issued on the heels of Sirius XM’s pre-announced Q3 subscriber metrics and recent financing moves regarding 2013 debt, RBC Capital Markets global media analyst David Bank reiterated his Sector Perform/Speculative Risk rating and $1.00 price target on shares of the Satellite Radio provider.

While Mr. Bank notes that “management continues to execute ahead of plan” and he saw Sirius XM’s pre-announced Q3 net subscriber additions of 334,727 coming in “better than expectations,” with the reported self-pay churn of 1.9% and the conversion rate of 48.1% metrics demonstrating “robust fundamentals,” he sees Sirius XM valuation as “hefty”at 17x his full-year 2011 EV/EBITDA estimate. Even when factoring in a NPV (Net Present Value) on Sirius XM’s approximately $8 billion in NOLs (Net Operating Losses), which would bring the multiple down to 13x, valuation concerns continue to “keep us on the sidelines.” Bank’s current $1.00 price target, which he upgraded to from .75 last May, is based on a “DCF (Discounted Cash Flow) analysis using 10% WACC (Weighted Average Cost Of Capital) and 3% terminal growth.”
Bank said that he was “pleased to see Sirius XM beginning to address potential longer-term liquidity issues” with the recent financing moves the company has taken regarding its 2013 debt tower. Banks noted that Sirius XM’s only debt coming due through 2011 was $230 million in converts. “We’re pleased to see management take an early initiative to address potential longer-term liquidity issues and take advantage of the current low cost-of-debt environment,” Bank said.

While Sirius XM’s pre-announced Q3 net subscriber additions of 334,727 beat Bank’s expectation of 178,000, he said that “this shouldn’t have come as a huge surprise,” since CEO Mel Karmazin had already announced Sirius XM’s new full-year 2010 net subscriber addition forecast for ~20.1 million at the Liberty Media Corporation 2010 Investor/Analyst Meeting in New York City on October 1st. Bank continues to believe that Sirius XM’s full-year EBITDA guidance of ~$575 million is conservative, due to “better-than-expected cost management” and the “continued roll-out of high-margin music royalty fees” to its subscribers.
While Bank sees a resolution to Howard Stern’s contract and Satellite Radio 2.0 as potential catalysts, he also says that “they could go either way.” Because Satellite Radio 2.0′s expected launch is still a ways out, in the fourth quarter of 2011, Banks doesn’t expect much detail in the short term, but he thinks that we may get a first glimpse of the Satellite Radio 2.0 product at CES (The Consumer Electronics Show) in Las Vegas, Nevada this January.

In regards to Howard Stern, Bank believes that the ideal outcome would be for Stern to stay, but work less and get paid less. Sirius XM would then still benefit from the Stern brand, but wouldn’t be burdened with the full content cost. Bank noted in his report that Howard Stern is responsible for ~1/4th of Sirius XM’s total programming costs. “Should he walk, it would probably be a short-term negative for the stock.” Bank said. Howard Stern’s contract is set to expire on December 31st, 2010.

Spencer Osborne said something interesting last week, that at first glance I dismissed:

"Some want to be hyper critical of analysts that deliver bearish estimates, but in some ways these analysts provide SIRI with additional fuel. By beating even the most bearish detractors time and time again, Sirius XM becomes an equity that investors are trying to catch and not the victim of yet another trading range."

David Bank's pertinacious adherence to a rigid, parochial and fundamentally flawed method of valuation will be his own undoing, damaging his credibility and rendering his research reports inutile . . . a fact, I am sure, that has not escaped the notice of RBC clients deprived of a recent 40% gain.

When analysts use terms such as "pricey" (as Bank did last week on CNBC) or "hefty" I have to ask . . . relative to what? Generic words like "pricey" or "expensive" are meaningless without relevant context. Aye, there's the rub! When David Bank starts talking Viacom (6-7% EBITDA Growth Rate) as a comparable peer company to Sirius XM (24% Compound EBITDA Growth Rate Forecast), you need listen no further.

David Bank certainly understands the Principal of Anticipation . . it is what the Discounted Cash Flow Model (DCF) is premised upon . . . exchanging present dollars for the right to receive future benefits . . . converting an anticipated future cash stream into Net Present Value (NPV).

David Bank was handed the ultimate gift this week. Mel raising guidance, strong sub #'s, credit upgrades, long term debt favorably refinanced etc. It would have been the perfect opportunity for David Bank to do an about-face and save face. The good news of this week provided the cover needed for the erroneous assumptions baked-in to his valuation model.

David Bank made a choice this morning when he got out of bed; he could have stayed silent and been thought a fool or open his mouth and remove all doubt. He chose the latter and, for that, he will suffer professionally.

Maybe Spencer Osborne is right after all.

Q310 Net-Ads Actual: 334,727
David Bank's Forecast: 178,000

Actual Net-Ads for the Quarter came in 88.05% better than Bank had forecast. The OEM #'s were pretty well known; they were certainly reported here as they were published.

If Bank was not surprised by the better than expected net-ads, then it is an extreme disservice to RBC clients not to have revised his forecast prior to the subs release.

Quote:

---

Originally Posted by Sirius Roadkill

Q310 Net-Ads Actual: 334,727
David Bank's Forecast: 178,000

Actual Net-Ads for the Quarter came in 88.05% better than Bank had forecasted.

---

Satellite 2.0 as a catalyst - he says it could go either way - what the hell does that mean ??? It is a complete revolution to their product/service so how is this not a big positive without question - what ????

I would have had a little more respect for him if he moved his target at least to 1.25. He seemed impressed with every metric and even called some of their guidence conservative, but yet left his target almost 30% below today's closing price ????????

What gives, what is his agenda or is he just plain stupid.

Or could he be getting his life threatened by some big wigs who he royally screwed out of 40% gains that want in much lower???

Now lets examine David Bank within the context of his professional peers . . . his peer-group if you will (a term he is no doubt familiar with). Arrayed from High-to-Low as follows:

Lazard – Barton Crockett $1.65
BGB Securities – Murray Arenson $1.50
Barrington – James Goss $1.50
Wunderlich Sec – Matt Harrigan $1.50
Standard & Poors – Tuna Amobi $1.50
Janco Partners – Martin Pyykkonen $1.40
Maxim – John Tinker $1.40
Miller Tabak – David Joyce $1.25
RBC – David Bank $1.00

So there it is . . . nice and clean.

Excluding Bank:

The Mean = $1.46
The Median = $1.50
The Mode = $1.50

The Mean, Median and Mode sit 46-50% above David Bank's current $1.00 Price Target. How does that not raise eyebrows at RBC?