Wunderlich Securities issued a new research note on Sirius XM, a day after erroneous rumors sprung up about an imminent announcement by Sirius XM and Howard Stern. The status of the Stern deal seems to be a central topic of discussion. Because of the money at play, the issue does bear importance to Sirius XM. Rather than focus on what a Stern deal means, Wunderlich's Matthew Harrigan breaks the issue down into what he considers a neutral stance. Harrigan puts a $100 million per year cost vs. the loss of 1 million subs and calls either of those situations neutral. As with anything, even Stern, there are two sides to the coin.
A quip by SIRIUS XM EVP and CFO David Frear at an investor conference also led some retail investors to mistakenly believe that Howard Stern would announce his future intentions imminently. Our Sternonomics analysis makes us neutral between a new $100mm annual five-year contract and losing one million subs;
Other key points from Harrigan covered in the report center on the GM IPO, debt to EBITDA Leverage, satellite capex, and the pre-owned automobile. The key take away is that SIRI seems to be looking for a debt to EBITDA ratio of about 2.6x on a trailing basis and 2.1x on a forward basis. Harrigan notes that this is a good ratio for a subscription model business.
Harrigan likes the fact that there will be minimal satellite expenditures until 2019, and sees that as a positive which will help the company improve their financials. In addition, Harrigan sees the used car channel improving substantially between now and 2015. He notes that there are 33 million satellite equipped cars on the road today, but that there will be over 70 million in 2015. This provides SIRI with ample ability to market to an ever-growing segment of the population. Finally, Wunderlich noted that OEM partners are excited about the sneak peak they got of satellite radio 2.0.
Wunderlich has a BUY RATING and a price target of $1.75 on SIRI.
Position - Long Sirius XM