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).
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.