by Demian Russian
J.P. Morgan media analyst Lev Polinsky reiterates his NEUTRAL rating on Sirius XM Radio (NASDAQ: SIRI) following the company’s second quarter results. At the same time Mr. Polinsky is raising his full-year 2010 EBITDA estimate 32% to $610 million, which is ahead of the company’s guidance for $575 million. While admittedly seeing Sirius XM as “executing well on all aspects” and viewing the company’s Q2 results as “ahead of expectations,” Polinsky continues to remain neutral due to valuation concerns. Polinsky’s valuation concerns factor in Sirius XM’s growth and multiple relative to its peers. “Acknowledging the expected above-peers revenue growth and margin improvement, we think the current multiple limits upside,” said Polinsky.
“The company appears to be executing well on all aspects of the story. We continue to question only the equity valuation, and reiterate Neutral.”
– Lev Polinsky, J.P Morgan Media Analyst
With Sirius XM’s stock trading at 15.8x JP Morgan’s full-year 2010 EBITDA estimate and 13.5 x their full-year 2011 EBITDA estimate, Polinsky sees limited upside — even when factoring in exceptional above-peer performance and attributing value to the company’s ~$8 billion in NOLs (Net Operating Losses). “Even assuming an exceptional F’11, with $100M in upside to our current EBITDA estimate, and crediting the company for part of the value of its NOLs, we get to a 9.9x multiple,” explained Polinsky. He points to other subscription-based companies for comparison which trade at only between 5-7x full-year 2011 EBITDA estimates.
While Polinsky is expecting an extra 543,000 net sub adds in the back half of this year, he believes the second quarter will prove to be the “high-water mark” for the year. Going into the second half of the year, Polinsky expects “less favorable comps” and “fleet buildups” to create a more challenging environment. Sirius XM added 583,000 net subscribers in Q2. Polinsky saw the company’s second quarter performance assisted by “rapid gains” in the OEM channel combined with a tempered decline in retail.
In spite of CEO Mel Karmazin’s voluntary comments made during the second quarter conference call indicating that an announcement regarding Howard Stern’s contract would be made ahead of the company’s Q3 report, Polinsky noted in his report that Howard Stern “remains an uncertainty.” Polinsky went on to say, “Stern’s departure could represent a one-time air pocket in the company’s subscriber growth trajectory, as well as possibly eroding the perceived value of the service to some potential new customers.” While Polinsky views the company’s loss of Stern as mainly a “headline risk,” because of Stern’s expensive price tag, he believes that cost savings would make up for any lost subscribers in the event of Stern’s departure.
Position: Long SIRI
Contact the Author: demianrussian@satelliteradioplayground.com
Hmmm…not sure what to make of the valuation comments. Seems there are two camps: analysts who are neutral due to valuation and analysts who think Sirius is a buy due to subscriber, revenue, and free cash flow growth.
Question is: Will Sirius slowly and modestly climb over the next 1-2 years or is due for a decent 10-15% jump now? Or both?
It’s very simple, analysts are comparing Sirius to companies that aren’t growing EBITDA half as fast as Sirius. Same thing happened with Infinity Broadcasting in the 90s.
Once Mel proves he can grow Sirius EBITDA 20% year in and year out then the price will move to 20 times EV/EBITDA as it always does. The analysts simply don’t believe he can do it.
My opinion is $1.75 within 1 year with approximate EBITDA of 720 mil in 2011. And I believe I am being conservative.
I agree and disagree with your suggestions. I agree that analysts are comparing apples and oranges without taking into account siri’s EBIDTA growth, its unique market position and potential and the fact that the company is still nascent. Where I disagree is the rate of growth. Mel projected $0.9B EBIDTA in 2011. I have every reason to believe that he will achieve it through a combination of savings, sub growth, lower interset payments and price increase. This is why I expect siri valuation by the end of 2011 at about $18B, which will make the s/p at over $2.00. Your estimate may turn out to be way too conservative. However, Q3, 2010 results may be a very good indicator of who is right and Q4, 2010 may definitively project siri’s path into 2011, in particular w/r to sub growth. If siri could produce over 583K subs in Q2, what will prevent them from doing so in Q3 and, in particular Q4, the best producer of the year? We also should account in a nominal scenario for auto sales growth in the coming years. So far Mel has delivered everything he promised with the exception of the sub count in 2009 and 2010 but they may still catch up in the coming years.
VL – I believe 20% growth is what Mel shoots for every year. The projections from 2008 did not take into account the huge crash of car sales in 2009 down to 10.4 million cars.
I personally think Mel can do closer to 30% per year in EBITDA but conservatively I think the target is 20%.
I also believe we will see solid numbers for used cars in the coming years. I think Mel will start to break these numbers out for investors in 2011 or 2012. As opposed to most all other investors, I believe in 5 or so years used cars will start to be a larger contributor to subs than new car sales.
I still believe that 2011 will be a stellar year for siri. There is so much going on for them that will contribute to siri’s phenomenal growth in 2011. This is a cumulative effect of all the positives that the company will start feeling. I will not be surprised if their EBIDTA even exceeds 50% growth in 2011 and 2012 and then it will slow down to 40% or so in the next few years. Savings alone can produce siri about $50M in 2011. And the price increase may bring in another $100-150M ni 2011. Of course all these assumptions are based on slow but still improvement of economy. I learned to read very carefully into Mel’s statements during conference calls. He made it clear at Q2 CC that this is just the beginning, and he does know what is going on. When he spoke at Q2 conference call, he already knew siri subs results and financials for July.
You may be right. He produced those type of EBITDA results at Infinity during the 90s. I am more conservative than you. The trick is to convince the analysts. My opinion is they will only be convinced by results.
Of course the wild card is Jessica Reif Cohen from Merrill. She accurately called CBS $55 on a 1 year target from a price of $18 in 1998 when Mel was CEO of CBS. She went out on a limb and almost called it to the exact day it happened in 1999. Nobody on the street understands Mel’s companies better than Jessica but right now Merrill isn’t following Sirius. Why??? I have no idea. There has never been a better media analyst ever on Wall Street. Nobody even comes close to Jessica. There is Jessica and then there is everybody else. Hope she picks up coverage soon.
Speaking of homerun hitters VL, did you catch this article on the XM satellites from Amy Gilroy. I haven’t seen her get a story wrong yet. She is the best reporter out there. Quite interesting
http://ceoutlook.com/sirius-xm-may-switch-over-to-xm/
Quite interesting to see a knowledgeable poster like VL talk about higher EBITDA growth than I do. Nice to see the discussion turning to what really drives valuation. EBITDA and Free Cash Flow.
My hope is Sirius uses that future free cash flow towards reducing debt. Also would like to see some of the debt extended out a few years at better terms.
When debt is lowered we should see much better EV/EBITDA valuations from the analysts for sure
I agree that the only way to convince analysts is to produce results. This is why I call 2010 a consolidation year where the company is starting a well orchestrated offensive on all fronts. This is the point that is called a transfer of quantity of effort into quality of the company in this case. As you know, in spite of subs number lagging vs. Mel’s projections he made in 2008 for 2009 to 2013, EBIDTA is right on the target and most likely will exceed his numbers.
As to the switsh to one group of satellites, this was to be expected. It will take some time and they will have to figure out how to beam to siri users or what to do on the ground. This is rocket science and I know this can be done. I am more curious what they are going to do with still available to them satellites and the frequencies that they bought. We are talking here potentially very serious money.
By the way Lev Polinsky and Barton Crockett are very good and experienced media analysts. What I see is no analyst is willing to go 20 times EV/EBITDA yet. Mel’s going to have to prove it. I see very little standing in the way. I think 20% annual EBITDA growth will probably be a piece of cake for him. How many times has Mel done this before? Countless. And Sirius is still nascent. Only 1 full year of positive EBITDA behind it.
If Demian could get Lev Polinsky or Barton Crockett on the radio show that would be really great to hear. They are 2 of the better media analysts and Demian’s interviewing skills have gotten much better over time.
This is not about blogs or message boards. This stock is about Mel convincing the Street that he can grow EBITDA at 20%+ every year for the next 5 years.
If you can grow in the previous downturn, what can you do when we have a recovery? What am I missing? Does anyone predict auto sales to stay at 12 million in the next year or two? The brand is just getting to be national, their content is topnotch and unrivaled, advertising is picking up and new radios are coming.
In the meantime, indifferent to the valuation discussion, Sirius bleeds a penny each day. How low does it go before it bottoms out? Are we doomed to bounce between .98 and 1.02 for the next three months?