After what has been virtual silence in the street this week, a few investment bankers have peeked out from the bunker to offer their latest opinions on Sirius XM Radio. Merrill, who is now part of the Bank of America family, and Goldman have doubts about the prospects of stock performance, while Barclays, now the proud owner of Lehman Brothers sees the stock more than doubling by years end.
Downgrade to Underperform; PO of $1.00 "We are downgrading SIRI to an Underperform with a price objective of $1.00. The recent dislocations in the credit markets have significantly increased the risk associated with upcoming refinancings, negatively impacting our estimate of the company’s cost of capital and equity value. We still like the fundamentals of the underlying business and believe there is a good chance Sirius will be able to refinance, but we think the downside risk is too great to maintain a Buy rating."
Thus, while Cohen likes the business model, the financing is a big overhang, and until there is clarity in this aspect of the company do not look for Cohen to adjust things to a bullish outlook. However, should the financing get taken care of, Cohen may well become bullish in a short timeframe.
Weinkes of Goldman was already a satellite radio bear, so the details of his report were not much of a surprise. The analyst took his price target down to 50 cents. Citing churn and the credit situation as the major factors, Wienkes sees still more downside and thus arrived at half a buck for his six month price target. The analysis of churn by Wienkes seems to indicate a lack of understanding of that aspect of the business, but regardless, the credit opinion is sound in that perception is bad on debt across the board.
"We continue to rate SIRI shares Sell and our price target is $0.50. We still see a viable market for satellite radio, SIRI’s niche, in our view, with a sole provider subsidizing mass market distribution and programming. Our base conclusion of overstated equity valuation relative to the expected FCF opportunity matches our prior analysis; however, the nature of our concerns has shifted toward the viability of the business model given current sub economics. That is, we believe the company will need to add roughly 8.5-9mn gross subs just to net 2mn new subs in 2009."
Less than a week after the Barclays logo appeared on the Lehman Brother building, the company has initiated coverage on Sirius XM Radio with a buy and a $1.80 price target, which is more than double current prices.
"Initiating coverage on SIRI with a 1:OW rating and a $1.80 YE 08E price target (driven by DCF), which represents approximately 27x 09E EBITDA of $273MM. This is a change from our previous $2.10 price tgt, due to a higher interest rate in our DCF calculation, reflecting credit market conditions. Company's future driven by growth of auto OEM segment, combined with cost benefits from XM/Sirius merger synergies. 09E EBITDA est $273MM vs. $300MM guidance. Key near-term risk is need for refinancing of approx. $1.2BN in maturing debt in 09E"
Position - Long SIRI, No Position Investment Banks