If you have followed SiriusXM’s Mel Karmazin for any length of time, you are likely well aware that the proper way to value media companies is on EBITDA growth or Free Cash Flow growth (Pick your poison). I like to look at EBITDA growth and use an EV / EBITDA model. Essentially this type of models measures the ratio between Enterprise Value and EBITDA. In this model you can arrive at a multiple at which the equity is trading. The more EBITDA growth a company is able to generate, the higher of a multiple it “deserves” to trade at.
You will oft hear management, analysts, and myself speak to SiriusXM trading at a premium. Essentially such a statement is not bearish or bullish. Rather it is simple fact. Relative to media peers in the space that might trade at a multiple of 10 or 12, SiriusXM tends to hang out in an area of about 17. In fact, it can trade as low as 15, and also trade above 20. All the “trading at a premium” means is that SiriusXM has the luxury (or pains) of trading at a higher than peer multiple. Pretty simple stuff.
Typically when SiriusXM trades at a multiple near 15 it represents a low point for the stock price, and a recovery is usually in the cards. On the other hand, when SiriusXM trades above 20, it means that it is at the high end of its range and there is likely a peak in the equity and a retracement. Again, pretty simple stuff. At this moment, based on current guidance for EBITDA ($900,000,000), and some pretty reasonable assumptions for debt and cash, SiriusXM is trading at a multiple of about 22.5. UH OH! That means a peak is happening and this stock will retrace! NOT SO FAST!
At this point in the year SiriusXM is usually on the cusp of issuing new guidance. The street anticipates this, and that means that there is more of a tendency to be lenient on a current multiple because when the new guidance is issued, we will see numbers that have room for the equity to appreciate further. Below I have outlined the current model with another that includes what is a reasonable assumption for 2013 EBITDA. As you can see, the multiple drops down to 18.4. WHEEEW! There is still room to move!
The fact of the matter is that SiriusXM is in that ever frustrating spot of current numbers vs. potential numbers. The current numbers are pretty much baked into the price, while the potential numbers leave room for SIRI to hit levels like my current September 2013 target of $3.25. If you are an active trader, you need to bear this in mind. The situation here in October is much different than if SIRI was trading at a multiple of 22 in March. If this were March, and I were an active trader, I would be looking for a sell point and waiting on a retracement. However, this is October, and I think that this equity can still stretch a bit further before the battle of current vs. potential valuation comes into play.
SiriusBuzz Premium members will have greater detail in the coming days that dovetail with the daily technical updates. The action today was impressive for the technicals! Happy trading.