sirius-xm-logoMiller Tabak analyst David Joyce issued a report Friday in which he maintained his neutral position, but lowered long term share price expectations. Joyce is one of only a few analysts that are actively following Sirius XM Radio.

Joyce cited that Sirius XM missed their expectations on revenue but that this was balanced off by better than expected cost cutting. Joyce previously had a short term price target of $0.50 and a long term target of $1.25.

The analyst feels that subscriber numbers will continue to be an issue in 2009, and that revenue may be hurt by this. Miller Tabak is decreasing their 2009 revenue estimate to $2.390 bn (-2%) from $2.507 bn (+2%) but increasing their 2009 OIBDA estimate to $372 mm, above the increased $350 mm guidance above our prior $317 mm estimate. The firm now expects Free Cash Flow of $(47) mm vs. our prior $(35) mm estimate as interest expense has ticked higher, albeit due to the relief getting funding to replace maturing debt. Capital expenditures of $71 mm were more than Miller Tabak's $50 mm estimate in 1Q09 which helped offset the OIBDA outperformance.

In essence, the firm sees a virtual treading of water for the remainder of 2009 and beyond. Investors may not want to hear such talk, but the reality is that Sirius XM has been treading water for quite some time now, and until citizens build confidence in the economy as well as the markets, Joyce may well have hit the nail on the head. Of course, a killer app for the iPhone could drum up positive traction, but until it is released, speculation is all investors have to hang their hats on.

Joyce feels that the major surprise evident in 1Q and into 2Q09 was the degree to which the Circuit City (a main proponent of satellite radio) bankruptcy hurt the retail channel. Personally, I disagree with this assessment. While Circuit City was indeed a major contributor to satellite radio sales, the retail channel was already hurting badly before Circuit City went away, and satellite radios are available in a ready supply from many other retailers. The issue at retail was a stale product line due to delays from the merger and consumer confidence.

Tabak expects revenue of $603 mm (-0.8%), down from their prior $628 mm estimate, with declines in subscription (due to fewer subs), advertising (the economy), and equipment (fewer subs). They expect OIBDA of $120 mm (a 20% margin), up from their prior $81 mm estimate and the $(105) mm posted in 2Q08 pre-merger but on a pro-forma combined basis. They also anticipate We Free Cash Flow of $(21) mm, below our prior $(4) mm estimate, and 2Q09E net subscriber losses of (319)k to reach 18.28 mm, sequentially better than the (404)k in 1Q09, but worse than their prior +156k net add estimate. Also, the drastic decrease in auto sales to a roughly 9 mm annual pace from the typical 16 mm pace, coupled with consumers cutting costs wherever they can, is causing them to estimate more net losses in the automotive channel, as well.

Miller Tabak's Joyce seems to be carrying a conservative slant to his outlook, which at this time, may be the prudent move. The analyst is not beating up the equity, but he isn't ready to sing SIRI's praises yet either. Practically speaking, Sirius XM is treading water.

So what does all this mean? Miller Tabak reiterates their Neutral rating due to the offsetting factors of OIBDA growth vs. continued recession, subscriber declines and cash-burn risks. With greater market confidence in the survivability of SIRI (although at the price of dilution), they are maintaining our short-term target of $0.50, but their long-term valuation is now a range of $0.49-$0.94/share, down from their prior $0.66-$1.26/share on lower FCF estimates, using 3x-8x terminal value multiples on their discounted cash flow valuation model. Also, they derive a $0.86-$1.10/share valuation range (down from prior of $1.07-$1.29/share range) by discounting back future growth parity-based multiples on OIBDA streams.

Position: Long Sirius XM Radio