Satellite Radio Playground

by Demian Russian

Murray Arenson

BGB Securities media analyst Murray Arenson raised his price target on Sirius XM Radio (NASDAQ: SIRI) from $1.35 to $1.50 this morning, but downgraded his rating from BUY to HOLD due to valuation concerns. While there is still further upside to Arenson’s new $1.50 price target, there must be a 15% or greater forecasted upside over the next 12 months to qualify for a BUY rating according to BGB Securities’ investment rating system. In a conversation with Mr. Arenson earlier this morning, he told me that he was very pleased with how the company was performing and that his new HOLD rating was purely based on valuation concerns after the stock’s recent run.

“Sirius announced strong 3Q subscriber data and raised $700 million in new debt as part of a refinancing. The company outlook continues to be positive, and the operations are strong. We have raised our forecast and our price target. However, given the recent performance of the stock, we are downgrading SIRI from Buy to Hold on the basis of valuation.”

– Murray J. Arenson, BGB Securities

Sirius XM’s pre-announced Q3 subscriber metrics beat Arenson’s projections across the board. Sirius XM announced yesterday that they had added 334,727 net subscriber additions in the third quarter, which surpassed Arenson’s forecast of 167,415. Q3′s Self-pay churn came in at 1.9%, beating Arenson’s forecast of 2.0%. Sirius XM’s Q3 conversion rate of 48.1% also surpassed Arenson’s projection for 45%. Arenson noted that these pre-announced subscriber metrics “reflect the company’s recently increased guidance.” On October 1st, Sirius XM CEO Mel Karmazin announced at the Liberty Media Corporation 2010 Investor/Analyst Meeting in New York City that the company was raising it’s full-year 2010 subscriber guidance to ~20.1 million, which raised the company’s 2010 net subscriber addition forecast to ~1.3 million.

In response to Sirius XM’s pre-announced Q3 subscriber metrics and recent financing moves, Arenson adjusted his projections and raised his forecast. He raised his full-year 2010 net subscriber addition forecast to 1.36 million from 1.17 million. He now sees full-year 2010 revenue coming in at $2.85 billion. He also raised his full-year 2010 EBITDA forecast to $605 million and his full year 2011 EBITDA forecast to $692 million.

Commenting on Sirius XM’s recently announced $700 million Senior Note offering, Arenson said, “The refinancing is positive, as it extends maturities, lowers interest payments, cuts into a $1.3 billion maturity tower in 2013, and swaps secured notes for unsecured notes.” Arenson also noted that while Sirius XM would save $5.8 million per year in interest payments, assuming a full tender of the 2013 Senior Secured Notes, they would also be paying a premium of $63 million to achieve this.

Arenson raised his per subscriber value to $489 from $440, which was the basis for his raised $1.50 price target. While Sirius XM is currently trading at ~16.9x Arenson’s full-year 2011 EBITDA forecast, when Arenson subtracts the value of Sirius XM’s ~$8 billion in net operating loss carry forwards he sees that multiple come down to ~14.0x.

BGB Securities media analyst Murray Arenson is scheduled to be a returning guest on an upcoming episode of Playground Radio.

Disclosure: Long SIRI

Contact the author: DemianRussian@SatelliteRadioPlayground.com