SiriusXM Price Target Set At $3.85
With SiriusXM issuing guidance today it becomes much easier to step back and visit valuation models while carrying baseline assumptions vs. a more slightly bullish model. When I look to establish a price target on an equity I like to use the Enterprise Value to EBITDA method. This type of model gives me a valuation that is based partly upon and considers EBITDA growth and EBITDA is the yardstick by which most media companies are valued.
There are many moving parts — these include a shifting competitive landscape, auto sales, Liberty media (and its goals), share buybacks, credit facilities, a satellite launch, expansion, and many other components. While all of these can help impact the value of the company, it is the baseline of company guidance that essentially sets the foundation. In arriving at a price target I build several models based on various share counts, debt loads, cash, guidance, and the amount by which I feel the company can exceed guidance.
Before moving forward I will outline the components of an EV to EBITDA valuation model…
- Enterprise Value – Enterprise value is a simple calculation that can be made at any time. it is the market cap of the company plus debt minus cash.
- EBITDA – This is earnings before interest, taxes, debt, and amortization – The company has guided to $1.1 billion in 2013
- Multiple – This is the factor by which the EV is above the EBITDA. The higher the multiple the more perceived value the company has. SiriusXM tends to trade between a multiple of 17 and 24 and spends most of the time somewhere around 20. In theory when SIRI is at a multiple of 17 it is undervalued (a buy). When Sirius XM gets to 24 it is overvalued (a sell).
Current Picture
The current picture simply outlines the current share price, uses SiriusXM guidance, assumes that no shares have been bought back, assumes no use of credit facility.
As you can see the multiple that SiriusXM is trading at is about 20.61. That is within the comfort zone for this equity.
2013 Valuation Model 1 – PPS with Multiple of about 20
This model assumes that SiriusXM uses all of the credit facility and takes 600 million shares off of the market. To arrive at a similar valuation multiple the share price could comfortably be at $3.25.
As you can see here the equity could comfortably hit $3.25 with share buybacks and added debt associated.
SIRI Valuation Model 2 with PPS reflecting multiple of 24
This is the same data with the only change being bringing up the multiple to 24.
Here you see that at the high end of valuation with share buybacks and added debt the company could potentially hit $3.87.
SIRI Valuation Model 3 with Multiple at 20 and EBITDA at $1.2 billion instead of $1.1 Billion
In this model all data is the same as above, but we have anticipated that SIRI can beat EBITDA guidance and come in at $1.2 billion.
The change in EBITDA allows the equity to reach $3.47 comfortably.
SIRI valuation Model 4 with Multiple at 24 and EBITDA at $1.2 billion
Data points are the same, but the multiple is brought up to 24.
In this situation the equity can reach as high as $4.27.
So what does all of this mean and how do we go about establishing a price target? Well, that is where each investor gets to place there own assumptions into the mix. I look at these charts and feel that SiriusXM can indeed approach $1.2 billion in EBITDA for 2013 That means that I can also see this equity with a peak price of $4.27 and a more realistic price of about $3.47. That leaves a delta of $0.70 and that is much too wide a range to set as a target. The answer may well be somewhere in the middle, and that would be $3.82. I am a bit bullish, so I will call it $3.85.
What investors need to bear in mind is that this target is for the end of 2013. There are a lot of days, weeks, and months ahead and it is a good idea to visit valuation models periodically to adjust if necessary. One key is understanding that a multiple of 24 is pretty much the peak valuation this equity sees. If it gets into that neighborhood it usually corrects down. On the flip side, if the valuation dips to 17 it is likely undervalued.
Good information, thanks.
“SiriusXM tends to trade between a multiple of 17 and 24”
One of these years the multiple is going back towards the stock market average. While these multiple’s could be supported in the past due to the improving financial’s of SiriusXM how long can it continue? Also SiriusXM is taking on debt and buying back shares. Look at the long term results of share buy backs – not good for the long term investor – I hope SiriusXM is the exception to the rule.
you mentioned a 50 million hit to revenue due to the GM deal, but I think it’s most likely more since they will be spending the cash to install the radios and get no prepaid sub revenue creating a temporary double wammy for 1 quarter.
Spence,
I think your approach to setting a target is pretty good, but one word of caution. The mutiple used for this type of approach generally reflects rate of growth expectations. High growth rate companies command a higher multiple and low growth companies a lower multiple. Using Sirius’s recent “comfort” range of 17-24 might be a little optimistic given that Sirius growth rate in subs, revenue, EBITDA and cash flow are all slowing.
This is one of the things that’s likely happening to Apple. their multiple is contracting even as the company is doing great, because growth “rate” expectations are slowing and their multiple is contracting.
Spencer. Maybe not a simple question, but:
One year and two years ago, if you had applied the same logic, reasoning, calculations, and assumptions as you did in this article, would you have arrived at numbers that would be close to what the actual SP numbers are today – one and two years later?
Harold….
The multiples would have been similar, but the pps of the stock would have been less.
What EV to EBITDA does is give you an idea of the amount of premium an equity is trading at.
Most media companies trade at 10 and 15. Sirius XM trading at 17 to 24 is a premium. A premium s deserved because the EBITDA growth justifies it. There will be a day when it will contract.
My 2015 target is $10 this is the perfect buy and hold stock! Yes it can be extremely volatile but it will always reach new highs every year. Also I wont rule out a “stock hype” once it reaches $5 that can push to $15, if you don’t believe me look at how it performed from 1996 to 2000 crazy gains!
Tom,
I like your enthusiasm, but $10 is awful steep.
Froma a valuation standpoint let’s look:
Share price of $10
Share count of 5.5 billion
market cap of $55 billion
debt of $3.7 billion
cash of $500 million
Enterprise value of $58.2 billion
EBITDA at $1.75 billion
That is a multiple of 33.25
If you make the pps $15 the multiple jumps to 50!
I assumed the company buying back 600 million shares in 2013, 250 million in 2014 and 250 million in 2015. I assumed the debt load remains at about $3.7 billion, and EBITDA growing at 25% per year.
Spencer remember the end of 2015 is almost 3 years away so this is a fairly conservative estimate, Sirius still has healthy upside and plenty of room to grow. I expect the new management to do well moving forward.
Tom I considered that.
EBITDA for 2013 will be $1.1 billion
EBITDA for 2014 @ 25% growth will be $1.375 billion
EBITDA for 2015 @ 25% growth will be $1.72 billion
I would say that the estimate is more aggressive than conservative.
$10 is a 300% gain from current levels in 3 years.
$15 is a 500% gain from current levels in 3 years.
From a valuation standpoint it just does not work.
Old school valuation was always a controversial subject there are too many factors involved, some would estimate that SIRI is worth less than $1.8 others think it should be a $4+ stock.
If SIRI can go from 0.05$ to $3+ in a few short years anything can happen, especially that we do not know yet if the company will find new revenue streams make great acquisitions such as buying out Pandora for a great price, I think my estimates are very possible only time will tell 🙂
Tom…..
Going for 0 to 3 was an entirely different dynamic. The company owed 500 million, did not have it, and nearly went bankrupt.
Buying pandora would cost 2 billion.
Spencer you need to be able to think outside the box, did you ever consider SIRI making joint venture deals with Samsung, Apple, Microsoft/Xbox… Did you consider SIRI offering other services other than radio? Did you consider expanding into the Mexican market? I am no tech executive but I am sure that there are so many great things to do with this company 🙂
tom…..
Siri had a deal with Samsung to be included in theiur televisions, DVD players, etc. It fell on its face and the promises were never kept.
Services other than radio are already being offered. It isnot a big driver for the company. Nissan is the only OEM going with the telematics thus far. Toyata just expanded the relationship but did not touch the other services. SiriusXM tv failed.
Expansion into mexico….
There will be big costs to expend into mexico. The latino channels here are great for a U.S. based lationo market but well below what would be needed to expand into mexico. I just came back from the border and have family down there. While the latino suite of channels is impressive by the standards of many here, it is still well shy of what would be a marketable service in Mexico. Expansion costs money and while there will be a day that the company expands into Mexico, it will come with a lot of additional channels
FWIW, personally, I dont see SIRI making joint ventures with Apple or Microsoft. Not within the next 3 years at least… I try not to predict what crazy stuff might happen in the future but, I don’t see them ever working with Apple and I would be surprised to see them on the Xbox which tends to cater to more visual media (even though I would love to see them on there).
Spencer, why do you even bother bro? unless you’re having a class discussion? (Been there done that)
Your the best at what you do and everyone and their mothers know it!
I think I am pretty good, but that does not mean I am the best. Thank you for the kind words though
Spencer you are good at what you do! You do not need anyone to tell you that, the fact that you do discuss topics with your website visitors makes your website more interactive and interesting and could very well lead them to signup for premium membership 🙂
Give it up already, Your knowledge base on SIRIUS-XM, especially the break down of key relation to the auto industry is immense 🙂
On a side note: Intelligence like an underwear…it is important that you have it but not necessary that you show it off…Thats what differs you from the rest!
i’m not convinced about slowing growth i think guidence was way to conserveitive siri will achieve 2mil subs in 2013 and your price target way off
Fraz…..
What would you establish for a price target and how do you arrive at it.
They may well hit 2 million subs in 2013. It ill not likely be a walk in the park though. They did about 535,000 in q4 this year vs. about the same last q4 while auto sales were sharply higher.
auto sales will be sharply higher in 2013. i believe this year the conversion rate will tick up to 47/48% with the improving economy. also the new deal with toyata will help beat all 2013 guidence.i think siri ends the year @4.25 or better
Fraz…..
Auto sales are expected to be between a15 million and 15.5 million. That is about 7% growth vs. the 13% growth we saw in 2012.
The new Toyota deal will be helpful.
We will lose between 400k and 500 k promos that are normally counted as subs in q4 of this year because of the new GM deal. That its one reason 2 million is not a walk in the park.
$4.25 is the top end of my projections. I can see the company spiking to that at some point, but it may not stay up there. There are a lot of moving parts.
-370 million shares need to be covered.
-xyz company is buying them out soon.
-I think the share buyback was just insurance in case the FCC said no to the buyout.
-Listening to siri instead of paying Apple 0.99 cents a song is much cheaper. I find their mix channels much better than downloading.
Question: When am I going to be able to listen to to SIRI on my smartphone?
Anyways:
Target price $8.00
Cash will grow, assets will grow, product will grow.
P.S: Pandora is not even in the running and a waste of money. Yeah ok they have a cool name, but thats all I will give them.
John one…..
250 million shares are short that do not really need to cover in the classic sense. They are tied to the converts. Sirius XM will supply the shares to cover, diluting the company, while the bond holder has a guaranteed and locked in profit.
Siri is now a $16 billion dollar company. There are not many players to buy them out, and no one is buying anything until liberty gains control, gets its $1.5 billion back and then spins the company.
The share buyback is the method by which Liberty can begin to exact back its investment into open market common purchases. This program will get back about 60% of what Malone needs prior to doing an RMT.
Siri is cheaper than Apple downloads, but then agin, Slacker is free
If you have an IOS or android smartphone you can already listen to siri
First of all, would you project good subscriber numbers for 2013 if you are trying to buy back shares????
Second, Malone is the biggest investor in SIRI, why is he going to hurt his investment??
Fuzzy…..
The company needs to show that it is still growing
Malone is not going to hurt SIRI. He is going to maximize his return on it
The customer service is terrible – going forward the new technologies are going to erode profits. Consumers will not tolerate poor service when there is an alternative.
And i do think subscribers will start leveling out starting 2014.
why is customer service terrible? i just called yesterday, bought a new vehicle and switched my account to the new auto with no problem….