RBC Issues Note On Sirius XM
RBC analyst David Bank issued a report today covering details of Sirius XM’s Q2 conference call. The analyst has no price target on the equity, but did make several points as to why RBC remains neutral on Sirius XM.
Like other analysts, Bank sees EBITDA beginning to surge, but shows caution with the realization that SIRI still needs to grow into its valuation and translate EBITDA Into cashflow. Bank seems to take no exception to the guidance issued by Sirius XM of over $400 million EBITDA and is expecting the number to come in closer to $500mm in 2010. However, the conservative side of the analyst notes that the enterprise value of ~$6bn, means that SIRI is currently trading at trading ~12x 2010E EBITDA (one of the most expensive valuations in our coverage universe). Thus, the upside potential is limited unless a higher valuation multiple is applied. In the current economic environment, that is hard to justify.
Bank wants to see SIRI grow into its valuation before he gets more constructive, and it is difficult to counter his reasoning. The valuations are tough, but the potential of profits around the corner is becoming harder to ignore. The main issue is that the news is good, but valuations and multiples already seem to be maxed out, and betting on potential is simply something that is not popular these days.
Tyler Savery Position – Long Sirius XM Radio
It seems we are more on a lock step that would follow to a large degree the future of the economy. Sirius Xm has made some cost cutting strides to shore up the bleeding while trying to get some promotional programs in the works. I believe we are at a point were the big picture comes down to the performance of the economy. So goes the economy, so goes Sirius Xm. We can hope more innovative ideas are implimented as time goes on but this company has poised itself to be one of the companies in the front row if this economy can get back on track.
Can you expand a bit on this, Tyler? So 12 X 500 million in EBITA = $6 billion. Is RBC saying the shareprice shows a current valuation of $6 billion, and therefore equals a valuation multiple that is too high based on EBITA? And it can’t get much higher? If the shareprice got to $1, would that make a multiple of 24, which is ridiculously high? And therefore will never happen?
What can Sirius do to address this in the next 6-12 months, or is it just time and continued execution?
Sorry to shoot so many questions at you, but I’m not following.
Enterprise value =
common equity at equity value
+ debt at market value
+ minority interest at market value, if any
– associate company at market value, if any needed
+ preferred equity at market value
– cash and cash-equivalents.
Brad . . Bank starts with “Enterprise Value” first then divides by 2010 EBITDA estimate to arrive at 12 multiple . . I would like to see more context as to how that multiple aligns with other media companies rather than to take Bank’s word that it is at the upper end of the range . .
He is merely using this metric (and I use that term loosely) as a down-n-dirty “rule-of-thumb” crosscheck against his other valuation models (testing the upper limit of reasonableness).
I have to think about this one some more . . seems to me there could be a circular logic argument made against this method . . imo
Brad…..
Valuation multiples take into account the earnings potential of a company. A few years ago media companies enjoyed multiples of 18 to 20. As banks were crashing, many multiples dropped down to as low as 6.
If you look at guidance, the company has said over $400 million EBITDA. What the analyst is saying is that with a multiple of 12, the company could be valued betwee 4.8 billion and 6 billion.
The company has 3.9 billion shares outstanding, but investors need to have caution because of the Liberty stake, which are not counted in the outstanding shares.
What the analysts are saying is that a multiple of 12 is already being aggressive, and thus, the upside is limited at the current time
the one rebuttal I would have to that is that the media companies that Sirius XM is being compared to are either stagnant or shrinking . . Sirius XM should be growing revenue considerably better than its peers (although there really are no direct comps to satellite radio) when you consider normalization of OEM channel at increasing penetration rate, CPO market, used cars, improved retail via docking station, Stern to IP, MLB to Sirius, Rosey O’Donnell etc . .
Sirius XM’s so-called peers, meanwhile, are taking on water daily . . the appropriate multiple should bear some correlation to future revenue growth; the current peer group is apples & oranges to me . .
Thanks for the explanations. I should probably go back and take Finance 101 again. I’ll have to think about this a bit.
Tyler . . please see my PM . .
In the determination of enterprise value, where does the 6 billion in NOL carry forward fit. Is this an off balance sheet item? IMO it certainly is an asset….something both Liberty and Echo Star value positivly.
BTW . . readers here should be aware that RBC operates a “Capital Markets” unit; operated within the “Capital Markets” unit is the “Alternative Assets Group.”
What is the “Alternative Assets Group” that operates within the “Capital Markets” unit you ask?
The “Alternative Assets Group (AAG)” is a unit within “RBC Capital Markets” dedicated to providing customized products and services to hedge fund investors.
Prospective investors in Sirius XM may wish to consider this information in evaluating the merits of Mr. Bank’s report and before making any individual investment decisions about this equity, IMO. DYODD.
Bank is flawed:
1.) Inputs current equity value (fair value!) and not “market value” (big difference between price & value);
2.) Method purports to solve for “multiple” which by extension solves for implied share price; problem. Formula requires input of current share price at fair value to solve for current share price at market value; circular logic.
ps tvstockpix . . Bank would probably argue that the benefits of the NOL carry forwards is implicitly baked-into the current equity price/fair value (very debateable imo).
I am generally reluctant to throw the baby out with the bath water but in this instance I am inclined to dismiss the entire RBC report for reasons stated here and above.