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.