I have spent the better part of the morning trying to answer the question on everyone’s mind; What will happen with the stock price? I have read through analysts reports that put such a wide range of targets on Sirius, that I thought it might be time to pretend there were no reports whatsoever, and create my own.
Keep in mind, that mine is no better than any other out there, and you should not invest on my results. I have made a LOT of suppositions to fill in the blanks. There are just too many unknowns in the look ahead to arrive at anything but a speculative conclusion. I hope as everyone else does to hear from Sirius regarding its future plans and projections this week.
So I broke out the legal pad and calculator, printed out Sirius and Xm’s SEC filings, and got to work. I looked at last year and assumed results as if we had a year of data to work with. Side by side and adjusting xm’s float by the 4.6 ratio, the first glaring fact is that this truly is a merger of equals.
My immediate concern is that as such, the combined company’s stock price won’t change much with the merger, assuming current valuations are accurate. Because of the synergies however, the stock should warrant a higher combined value, as profitability will occur sooner as a merged company, than as “stand-alone’s.”
Going forward requires some fortune telling. I had to look at the individual expenses of the 2 companies and make some assumptions on where costs could be reduced and by how much. It’s my belief that the 400 million stated by the companies recently in synergies is grossly understated, as I could easily turn that into a billion dollars without trying very hard. Just look at what Mel Karmazin acheived in 2006 -2007 when he reduced the net loss by 1/2!
I then had to assume revenue growth based on what we know and also assumed revenue streams from increases in advertising and other media and licensing potentials. In the end, I can see how Merrill Lynch came to their 4.50 price target that they have issued. I also can see that the 4.50 price target is based on current sat rad growth only, with some cost cutting. Citi has a much higher target, which I believe takes into account additional sources of revenue that we officially have heard nothing about, and a higher amount of synergies.
The problem I found with Goldman Sach’s assessment is that it goes against anything that the previous revenue growth has demonstrated. They seem to be assuming only one revenue stream from satellite radio and oem growth, and joining the 2 at the hip without understanding the basic fundamentals of increased penetration and how these subscriptions are paid for, by whom, and completely ignore any other potential sources of revenue.
In the end, I agree with Merrill Lynch, with an additional range to 6.50 should we add an extra 500 million dollars annually from new revenue streams, and cut costs accordingly.
Position: Long Sirius, XM.