By Demian Russian
Following Sirius XM Radio’s (NASDAQ:SIRI) reported Q3 results, Maxim Group senior media analyst John Tinker reiterated his BUY rating and raised his price target from $1.40 to $1.80. Pointing to the fact that the Satellite Radio provider was continuing to trade at a discount to Netflix (NASDAQ:NFLX), which is currently trading at about 26.4x 2010 and 20.6x 2011 EV, and that “mature media companies” are only growing EBITDA in the single digit range, he said, “SIRI should trade at a premium due to its long-term 24% EBTIDA growth rate, which implies an EBITDA PEG of 0.8x.” Tinker’s upgraded $1.80 price target is based on 18x estimated 2011 EV, which equates to a 2011 EBITDA PEG of 1.0x, compared to a group PEG of 0.9x. He also updated his DCF analysis, using a 12% discount rate with an implied terminal multiple of 11.2x and 3% perpetual growth rate, which yields a 12-month fair value of $1.81.
Tinker raised his full-year 2010 adjusted EBITDA estimate to $628 million, compared to the company’s guidance for $600 million, noting that Sirius XM’s EBITDA has grown 39% in the first three quarters of this year. His is estimating Q4 EBITDA of $146 million, which surpasses the company’s forecast for $118 million. Tinker’s full-year 2010 EBITDA estimate equates to a 27% year-over-year improvement, in contrast to the company’s 11% forecast. He also raised his 2011 EBITDA estimate from $715 million to $740 million, and his 2012 EBITDA estimate from $908 million to $940 million. In light of Sirius XM’s growing EBITDA and the company’s recent refinancing moves, resulting in lower interest costs, Tinker also raised his FCF forecasts for 2010, 2011, and 2012 to $176 million, $379 million, and $724 million respectively. He sees free cash flow growing 115% in 2011 and 91% in 2012.
Commenting on Howard Stern, who’s five-year contract with Sirius XM expires at the end of the year, Tinker noted that “the company implied that, with nearly $3 billion of revenue, it could buy whatever programming it needed – and that if it did not, it would be due to cost discipline.” While noting that estimates vary for exactly the size of Stern’s audience, assuming 2 million listeners, Tinker estimates that Sirius XM could lose approximately 200,000 subscribers, which would equate to only ~$26.4 million a year in lost revenue, versus the ~$80 million a year that Sirius XM would save by not having to pay Stern’s salary.
Noting that while HBO subscribers were disappointed when the popular program The Sopranos ended its run, “Very few cancelled,” he said. Tinker also went on to point out that only about 1.2 million of the ~10 million XM subscribers have added the “Best of Sirius” package, which brings Stern to XM listeners for an added monthly fee. “Perhaps Howard is not the draw he used to be,” Tinker said. While noting that “there is a tendency to buy in anticipation and sell on news,” and that he would not be surprised to see the the stock fluctuate due to continuing speculation regarding Howard Stern, Tinker stated that “any pull backs should be seen as buying opportunities.”
Tinker believes that Sirius XM’s continuing ability to execute by growing subscribers, while also managing costs, its increasing free cash flow, the growth potential in the used car market, Satellite Radio 2.0′s coming channel expansion, and the opportunity in the Hispanic market, “should all lead to SIRI becoming one of the most valuable media franchises in the business.”
Disclosure: Long SIRI
Contact the author: DemianRussian@SatelliteRadioPlayground.com
i think they may lose a bit more then 200k if howard leaves but anyone who has had sat radio for awhile realizes that it is the only way to go so a bit more then 200k might be lost but nothing that significant that it would negatively impact the company financially–From a marketing standpoint, that could be more of an issue in the shortterm
Howard stern is great, but he wont be around forever. Sirius to 3 by march 2011
Nice read Demian…Now this analyst did a really nice analysis based on a good valuation model unlike some other more negative analyst that have some highly suspect projections based on very weak analysis of the company metrics…just sayin
Nice work Demian. You put in a lot of work getting the valuation methodology to the readers which I for one appreciate. Question – Does Tinker consider anywhere in his report the competition Stern would bring if he left. That 200,000 figure is shockingly low and completely unrealistic if Howard chooses to compete.
One other thing I would like to point out. Now you have an analyst up to 18 times next years EV/EBITDA. Getting very close to a multiple that coincides with the 20% annual EBITDA growth Mel always targets. You have to love seeing the analysts believe in the growth rate. About time.
Great summary, Demian!
I assume Tinker’s analysis does not include potential reasonable price increase of $2+ in the second half of 2011. It is also difficult at this time to factor in used car market contribution in 2011, 2012 and on. I use as a guidance Karmazin’s projections through 2013. At this point this is personal for him after several years of humiliation that he has not been used to during his glamorous career in radio. So far in 2010, he will beat only one, though quite significant, of his projected parameters – EBIDTA. He projected $0.6B for 2010 but the company will exceed this number. Karmazin was projecting a 50% increase in EBIDTA for 2011, that is $0.9B. This is an achievable number if they raise prices after August 2011 and auto market does well. 2012 appears to be a pivotal year when they should blow out all numbers primarily due to a price increase and desirably fast general growth. Karmazin projected $1.3B EBIDTA and $1.0B fcf based on growth only (26.2M customers) for 2012. In my view this is more than feasible by raising the price by $2 or more that would constitute at least additional $0.5B in 2012. If nothing out of the ordinary happens, siri will be a huge cash producer in two years. I see the stock at the end of 2012 not less than $5 a share. It is quite possible that a positive hype may drive this stock to a range of $6 to $8 in 2012 or even earlier. The company’s future is really bright. Those who are long stand to make real money.
Come on VL. Those projections were made before the biggest recession and car sales collapse in our lifetime. A 50% increase in EBITDA for next year is unrealistic with a possible price increase not until summer. That impact will show through more in 2012.
Tinker is at 18 times with about an 18% increase in EBITDA in 2011 and acceleration afterward. I think he is being a bit more realistic than you. Although I do believe Mel surpasses 20%.
You do have a point. However, he will exceed $0.6B EBIDTA for 2010 in spite of the recession and collapse of the auto market. If we also assume that auto sales are on the mend, it is quite possible that 2011 EBIDTA growth will be much higher than Tinker’s 18%. Although 50% is quite challenging, 30% to 40% is feasible if at least some of the uncertainties play out positively. I agree that 2012 is much more likely to be a stellar year for siri but I do not rule out 2011 because the company is on a roll. If we add Karmazin’s ego, “everything is possible”. Few believed that siri would crawl out of bankruptcy in February 2009. I did. Only because of Karmazin. My belief drew all my siri decisions related at that tough time. Let us wait and see.
I think the last 2 years of EBITDA growth have been cost reductions due to the merger, the royalty pass through, and I actually believe lower auto sales helped EBITDA due to lower SAC.
Going forward higher subs have to play a role, plus a possible price increase. From here on out I believe they have to drive the top line revenue in order to drive the bottom line EBITDA. Although I do believe as used cars come more into play, SAC comes down over a period of years. Used car reactivations have a SAC of basically ZERO as Frear pointed out on the concall.
Should read “SAC per gross add” comes down as a result of used cars.
200,000 is a very conservative estimate. Don’t forget the reason Sirius took over XM, and SIRI was the underdog in the beginning. All analysts seem to be downplaying the number of listeners that will move wherever Stern moves to. His fans listen to nothing else and will not pay 2 subscriptions to have music channels. I have a lifetime subscription to SIRI which means they will not see another dime from me, so you better factor liefetime subscriptions into the financials.