JP Morgan has returned to the satellite radio analysis arena with a cautious neutral rating, The firm, who was involved in the merger process believes the post-merger company, Sirius XM Radio will survive and have new flexibility to scale its expenses and capital structure to the market opportunity.
On the cautious side however, JP Morgan feels that Sirius XM Radio, "faces a trifecta of macro, valuation, and capital structure concerns that are likely to weigh on the shares near term, making us more cautious than when we last covered the pre-merger companies 1.5 yrs ago, rating them both OW."
They feel that post merger, that there is a better company, and they see the synergy story in a value similar to that set forth in guidance by Mel Karmazin. JP Morgan sees the guidance for $400m of merger synergies in 2009 as attainable, and further points out that synergies will grow in subsequent years, is reasonable assumption. JP also sees positive free cash flow in 2009 and beyond.
On the caution side, the debt picture of Sirius XM Radio raises a bit of concern according to the analyst. Sirius XM has $1.085b of debt coming due in 2009. The common assumption is that Sirius XM will be able to refinance as the business should be stronger and credit markets hopefully no worse than recent days when Sirius XM refinanced $1.25b of debt for the merger. Thus, better financing terms are tied directly to the company performing better, as well as the condition of the credit market. Given Mel Karmazin's history of obtaining his goals, the real concern will be the credit markets, which most assume will not be worse when the financing becomes a short term issue.
Noting the condition of the economy, JP Morgan sees satellite radio as discretionary, which could present some harder than anticipated times for Sirius XM. However, even in a harder economy, satellite radio seems to be holding the line on costs, while improving take rate and churn. Over the next couple of years JP Morgan sees overall installations in the OEM channel ramping up to 64% by 2010 in contrast to about 35% in 2007.
The reason for caution? JP Morgan sees valuation as challenging. At a price of $1.46, just over 3 billion shares, and a market cap is $4.4b, and a net debt at $3.0b, they estimate the firms value at $7.4b, 20.4x our 2009e adj. EBITDA, which thy note is slightly above guidance. JP Morgans analysis of subscriber economics suggests that the current enterprise value discounts the current sub base, but not growth beyond that.
Position - Long SIRI