Satellite Radio Playground

by Demian Russian

On the heels of Sirius XM Radio’s (NASDAQ: SIRI) pre-announced Q3 subscriber metrics and recent financing moves, Lazard Capital Markets senior media analyst Barton Crockett reiterated his BUY rating and raised his price target from $1.50 to $1.65. Crockett is basing his $1.65 price target on DCF (Discounted Cash Flow) and a 13.6x multiple of his 2012 estimated adjusted EBITDA forecast of $835 million, also atributing credit to the company’s ~$8 billion in NOLs (Net Operating Losses). He sees “rising loyal” subscribers and ARPU (Average Revenue Per User) being driven by “avid usage.” With a 60% penetration rate in new vehicles, growing revenues carrying 70% margin, declining capital expenditures, and no taxes, Crockett sees Sirius XM’s full-year FCF (Free Cash Flow) surpassing $1 billion by 2015.

While Crockett sees Sirius XM becoming “an aggressive share repurchaser” in the long term, he doesn’t see that happening before 2012, due to the risk that a reduction in shares could give Liberty Media (NASDAQ: LMDIA, LCAPA) a more than a 50% stake, and that the resulting change in control could put the value of Sirius XM’s ~$8 billion in NOLs at risk. Crockett also believes that Sirius XM may want to “save its powder” to pay or extend its remaining 2013 debt. Crockett sees Sirius XM beginning to aggressively buy back shares in 2014 and continuing to do so at a $500 million to $2 billion pace through 2020.

While Crockett sees net debt leverage possibly falling to zero by 2015, he notes that a net debt leverage of zero is “probably too low for a business like this, which should comfortably support 2x to 3x leverage.” Because using leverage to buy back stock would reduce Sirius XM’s pretax earnings and thus reduce the value of the NOLs, Crockett is hesitant of getting too aggressive with his share repurchase projections.

He sees the NOLs being more valuable to Liberty Media than Sirius XM, as Liberty could utilize them more quickly be offsetting capital gains from the sale of other assets. Because of this, Crockett sees a scenario where Sirius XM and Liberty may want to find a way to merge after 2012. “Liberty could compensate Sirius about $2.3B for the value of its NOLs today, and gain a roughly $700M arbitrage lift by using the NOLs sooner than Sirius could,” Crockett explained. This would benefit Sirius XM because they could aggressively buy back shares sooner, while also protecting the full value of the NOLs.

Commenting on Howard Stern and what the outcome of the contract negotiations may be, Crockett believes that it is more likely that Stern will stay onboard at Sirius. He sees Stern getting paid ~$80 million a year, without any stock being included in the deal. He doesn’t see Stern being offered anything that will match what Sirius offers him, and he doesn’t see Stern leaving Sirius XM for an Internet streaming service. “Stern’s profile as a streaming service we believe would fall, making him a less impactful ‘King of All Media’,” Crockett explained. While he does see the stock taking a hit in a scenario where Stern would be competing with Sirius XM on an Internet service such as Pandora, he also said, “If Stern left, we believe the value of the sub drain would likely be less of an impact than the $80M Sirius pays for his services.”

Disclosure: Long SIRI

Contact the author: DemianRussian@SatelliteRadioPlayground.com