SiriusXM is a mere three cents away from my 2013 realistic target of $3.75 and fifty five cents away from my "high pop" target of $4.25. To see this happening in the summer gives me great confidence. Things are looking great, but as usual we want to look deeper.
These moves have all been happening on lower than average volume. While consolidation, small moves up, or small moves down can happen on lower volume, we typically do not see equities grab 52 week highs and hold them on lower volume.
On the positive side we are setting up for a great quarterly conference call with several record numbers. I suspect that the street is figuring this out and could well be jockeying for position to play this out. On the negative side we are now in uncharted waters with the equity reaching highs that have not been seen in quite some time. We are also months away from any updated guidance that would allow an EV/EBITDA valuation to increase. This places SiriusXM at the high end of the valuation scale. Traditionally SiriusXM is most comfortable at about a multiple of 20. On the low end it will approach a multiple of 17, while the high end is usually 24. As you can see in the valuation model below, SiriusXM is testing the high end of the valuation scale now. Investors should note that I am using the untapped $1.25 billion credit facility in the cash line as well as in the debt line. With an ongoing share buyback program some of these numbers will change. By example, as shares get removed from the count the market cap will come down. Such a dynamic would lower the multiple slightly.
Now if one were to consider a 20% growth rate in EBITDA for 2014 then the valuation model shifts to a lower and more "acceptable" multiple. Essentially we are now in a period where we will want to be a bit more aggressive in the modeling. SiriusXM is performing quite well, and there is no reason to expect a downward surprise in the fundamentals of the business. The model below i conservative in that the share count is not yet adjusted and the debt columns have not been adjusted. Both of those would likely come down thus lowering the multiple further. As you can see, there is reasonable justification from a valuation standpoint to justify the current equity price.
While there is a reasonable argument that SiriusXM is approaching over-valued territory, there is also a reasonable argument that the equity is actually undervalued at this point. When presented with this situation one must look to the fundamental story and other considerations to find which model to assign superiority to. Wit the company seeing record subscriber growth, conducting share buybacks, and seeing improving metrics each quarter investors can have some well founded confidence in using the more aggressive model. That lets investors consider equity prices that can indeed comfortably challenge $4.25.