by Demian Russian
In a research note issued this morning, Barrington Research Associates Senior Investment Analyst covering the Media and Entertainment Industry, James C. Goss, reaffirmed his OUTPERFORM rating on Sirius XM Radio (NASDAQ: SIRI) and moved his 2010-based $1.25 target price to a 2011-based target price of $1.50. “As this fundamental story has developed, management has created trends in EBITDA and free cash flow that should result in positive trends in earnings metrics down to positive EPS starting next year, plus the potential to pay down debt and strengthen a financial position that is increasingly improving,” Goss said.
“We have been encouraging investors to consider this story on its fundamental merits for some time. We feel an increasing number of investors are willing to give this story more serious consideration as management demonstrates success in dealing with the speculative elements and creates a clearer path to meaningful positive results.”
– James C. Goss, Barrington Research Associates
Goss sees the main driver of Sirius XM’s subscriber growth coming from the OEM channel, making up for the continued erosion in the retail channel. Goss noted that gross subscriber additions in the OEM channel are more than 6X higher than that in the retail channel, which he viewed as remaining “relatively flat.” While noting that Sirius XM’s conversion rate of 46.7% for OEM paid promotional subscribers was “very impressive,” he also noted that 53.7% of paid promotional subscribers fall off quarterly. With a monthly churn rate slightly below 2%, he sees the implication that Sirius XM would need to replace close to one quarter of its subscriber base every year just to break even. While calling this a “daunting task,” Goss feels that Sirius XM is up to the challenge and can continue to grow its subscriber base. Goss noted that subscriber net additions have trended higher almost every year except for the recessionary 2009, which “dragged down gross additions while deactivations lagged at the higher previous levels.”
“Sirius XM is on track to generate increasing subscriber counts, higher revenues and improving profitability.” Goss said. He sees improvements in cost containment and revenue potential driving Sirius XM’s EBITDA growth for several years. He expects Sirius XM’s EBITDA reaching $1 billion by 2013, which indicates a compound annual growth rate of 24% from the $463 million generated in 2009. “The company’s financial position is much improved, and the potential for debt reduction will accompany the generation of positive free cash flow,” Goss said. He also sees Sirius XM having greater pricing flexibility at the end of July 2011, when pricing restrictions from the merger expire.
Commenting on what the possibilities of Satellite Radio 2.0 may be, Goss speculated that Satellite Radio 2.0 could bring “DVR-type functionality” or possibly a “Pandora-like option using the vast music libraries at the XM and Sirius studios.” Goss sees Sirius XM management seeming “excited to place hints” and pointed out that the year-end 2011 target release for Satelllite Radio 2.0 also coincides with the time merger related price restrictions are lifted, noting that new revenue possibilities were possible.
Barrington Research Associates Senior Investment Analyst James C. Goss is scheduled to be a special guest on an upcoming episode of Playground Radio.
Position: Long SIRI
Contact the Author: email@example.com