Miller Tabak Upgrades Sirius XM Radio
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
I’m hoping that in the 583k sub. number there will be a significant number of used car and Premium used car subs, which will help keep the SAC down.
I have a friend with 2008 Lincoln who subscribed recently in response to a direct mail piece.
Even if the used vehicle numbers are significant, I hope they give them to us for the sake of establishing a base line.
James,
I agree. I would like to see the effect from the used car market. What interests me more are the reasons that people are dropping thier subscriptions. Mel should give us that breakdown so we don’t have to guess. I wonder how many people unsubcribe and then re-subscribe later on.
While many analysts may not revise their target prices, I do believe that they will upgrade their holds to buys. Much like Miller Tabak and others hesitant to revise their numbers before 3rd quarter reporting, they all know that Sirius XM is undervalued at $1.00.
Lets not forget that these analysts have to give time to their clients to cover before its too late. Do you believe it is all about the models? it is all about the money. When the upgrades come, the price would have already moved.
By your own admission you believe that siri was valued at $1.05 and that was before these new subs. We are way undervalued.
Wasn’t it just in the past quarter that Sirius had the $20 for 4 month special to lure back former customers that had allowed their subs to lapse ? If this is a significant # of these subs then the real test is how many of them continue to pay at the full price after that promo ends .
This company has been undervalued ever since the merger. The value pre merger b/w both companies was estimated around 14 billion including debt. This was with negative fcf, investors should see some great value to come in the next few years. My estimated target for the end of the year is $1.85.
Spence, I believe you are a little off base with some of your comments. First the analyst models are not based just on “balance sheets”, but a combination of balance sheets, income statements and most importantly cash flow projections.
Yes, there is a cost to add subscribers, but those subscriber additions represent future revenue grow and next year those subs added this year cost nothing, but the revenue goes to the bottom line.
As you pointed out, the MT analyst uses a discounted cash flow analysis to develop his valuations. I guarantee those additional subs represent an increase in net present value, thus value of the stock, or Mel wouldn’t be adding them. That means the value of those future cash flows discounted to the present is worth more than the increase in SAC this year.
This is an important point – this stock is more valuable today because of the subs added in the 2nd Q will produce future revenue that is higher than the cost of adding those subs.
Discounted cash flow models are not just about present cash flow, but future cash flow discounted to the present.
I agree. Adding subs is good. I have pointed out many times that the cost to add subs is the company’s investment into the future. MT did the appropriate thing in his analysis. He maintained the short term, acknowledging the short term cost, while raising the target for next year.
It seems people are not understanding the different. Between SAC and SAC per gross addition now. More gross additions gives a bigger number to divide costs into. Today I am getting emails saying that SAC will remain the same because of this. Not true. SAC is going up. SAC per gross addition could remain similar.
My point is that the purpose of a DCF (discounted cash flow) analysis is that it allows you to calculate a net present value of those future cash flows. So the net affect of higher than previously projected sub growth, is an increase in present value, not just future value.
The change in net present value essentially represents the net affect of the present cost of those subs compared with the increase in future cash flow discounted (using a cost of capital assumption) to the present.
I’d add to that that its not just that Sirius added over 500,000 subs in the 2nd Q, but what that means for future sub growth with the OEM SAAR still at only about 11 million.
Remember 500,000 subs was Sirius’s original estimate for the full year at about 11 million SAAR. The lower churn and higher take rates suggests Sirius will do much better in the future
(sub and revenue growth) than most assumed. Yes that growth has costs, but the net cash flow growth improvement should be significant. Whether analysts have the courage to recognize that remains to be seen.