With the positive subscriber news from Sirius XM yesterday Miller Tabak took the step to upgrade Sirius XM. Many investors feel that other analysts should follow suit, but a series of analyst upgrades is not as likely as many might think. The subscriber numbers beat most analyst expectations, but analysts build their models on balance sheets, not subscriber numbers. The addition of 300,000 more gross subscribers from last quarter to this quarter cost about $20 million in additional subscriber acquisition costs (SAC). These costs bring down EBITDA.
Miller Tabak analyst David Joyce uses a discounted cash flow analysis in his model. The analyst recognizes that while the company outpaced his subscriber estimate of 166,000, that he feels consumers are adopting satellite radio and the subscriber numbers reported in Q1 were not an anomaly. Joyce upgraded Sirius XM to BUY from Neutral. Their 1 year price target (short term) remains at $1.25, and they have now added a long term price target of $1.45.
David Joyce is assigning a $74 SAC cost for Q2. This would put SAC costs well above $30 million not accounted for in his previous model, and thus a decrease from an operating cash flow from his previous estimate of $159 million down to $119 million. Essentially Joyce believes that satellite radio can continue to grow subscribers through the rest of the year and that other metrics can fall in line for his model.
Other analysts may be challenged in issuing upgrades. Many models were blown apart by the additional sub numbers, and by extension, these analysts need to account for anywhere from $30 million to $50 million of costs that were not anticipated. Yes, new subs bring revenue to the table, but it takes time for the revenue to catch up with and offset the SAC cost. More likely than not analysts will update their models, maintain their current targets, while becoming a bit more confident in Sirius XM’s ability to grow. I see new analysis being issued, a lot of “maintain ratings” and no downgrades coming out of what Sirius XM announced. Most analysts will want to see the rest of the data announced at the Q2 conference call before making any blold moves.
Position – Long Sirius XM Radio