Satellite Radio Playground

by Demian Russian

Janco Partners upgraded Sirius XM (NASDAQ:SIRI) from ACCUMULATE to BUY today. Janco Partners’ senior research analyst, Martin Pyykkonen, also upgraded the target price for shares of SIRI form .80 to $1.30 per share. “Our $1.30 price target is also based on a DCF analysis with a terminal growth rate in the 3.5%-4.5% range and a WACC in the 6.0% – 7.0% range”, Pyykkonen noted in his report. He is “conservatively” estimating $140 million in FCF for 2010, which is less than the $185 million in FCF the company reported for full-year 2009. While estimating FCF from the high teens to mid 20′s for 2011-2013, Pykkonen explains that his more conservative guidance for 2010 allows for “unforseen timing related to working capital changes.”

Mr. Pyykkonen sees EBITDA growth outpacing revenue growth through 2011. He estimates 23% EBITDA growth vs. 9% total revenue growth for full-year 2011. While noting that in the near term SAC expense growth will probably outpace revenue growth, Pyykkonen predicts that Sirius XM will finally be able to monopolize on the merger with “negotiating clout”, to control programming and content costs as a percentage of revenue.

Speaking on the OEM outlook, Pyykkonen doesn’t see any market share shifts between auto makers affecting Sirius XM meaningfully. He is assuming “3rd party estimates” of around 10.3 million in new U.S. auto sales for 2010 in his model. He sees the percentage of OEM subscribers to total Sirius XM subscribers continuing to grow, and estimates 7.9% OEM subscriber growth for full-year 2010 and 6.4% for full-year 2011. Retail subscriber estimates were not mentioned in his report.

While Pyykkonen did note that there “could be” an opportunity for Sirius XM from television subscription services in the future, his 2010 and 2011 estimates are not looking for any meaningful revenue from this. Sirius currently offers its Backseat TV service for $6.99 per month (in addition to a Sirius Satellite Radio subscription). Geared towards children, the limited line-up of 3 channels include: Cartoon Network Mobile, Disney Channel, and Nikelodeon. Without expanding its service, Sirius XM would face some stiff competition from the rising popularity of FLO TV, which currently offers a much broader line-up, including: CNBC, CNN, FOX, MSNBC, MTV, ABC, CBS, and Comedy Central.

Clearly viewing a Sirius XM delisting as unlikely and noting that the company’s stock is “right at the borderline” in regaining compliance of the NASDAQ’s $1.00 minimum bid requirement, Pyykkonen sees the Nasdaq Independent Hearings Panel granting a six month extension as the most likely scenario. Noting the huge retail investor base in Sirius XM’s stock, a 1:2 or 1:5 reverse split seemed more likely in the event that one was required to maintain the company’s NASDAQ listing.

Position: Long SIRI

Contact the Author: DemianRussian@marketplayground.com