By Demian Russian
Citadel Securities weighs in on Sirius XM (NASDAQ:SIRI) ahead of Q4 earnings, initiating coverage with a NEUTRAL rating and a $2.00 price target. In a newly issued research report prepared by Citadel analysts Vijay Jayant, Kunal Madhukar, and Mark Lanzana, an attractive case is laid out for Sirius XM’s long-term growth potential. Citadel points to several key drivers of this growth: rebounding new auto sales, a large untapped used auto market, improving margins due to content and OEM contract renewals, pricing flexibility when the FCC removes pricing restrictions after July 2011, an improving debt picture allowing ~$5 billion in stock buy backs by 2015, and ~$8 billion in NOLs — which not only improve FCF, but carry strategic value as well.
SIRI’s programming depth and diversity provide a variety that we don’t find anywhere else on traditional or online radio. We think satellite radio complements these alternatives rather than directly competing with them as it has grown its subscriber base despite increased availability of Internet-based radio options, smartphones and MP3 players.
– Citadel Securities
In their initiation report, Citadel goes into great detail analyzing Sirius XM’s competition. While noting that there is “a lot of competition in the space,” they also point to Sirius XM’s uniqueness which distinguishes it from its competitors. While they admit that Sirius XM’s demographics are changing as the service becomes more mainstream, they suspect that Sirius XM subscribers also own smartphones, MP3 players, access Internet radio services such as Pandora, and even still listen to terrestrial radio. Citadel notes that all of these devices and services are not new and, “despite their increasing presence, Satellite Radio continues to grow as a category.” In the end, after all of their analysis, Citadel concludes that Sirius XM Radio “has no true substitute.”
Noting that consumers primarily listen to radio in their vehicles and that Sirius XM has agreements with all of the U.S. automakers, they view an improving economy fueling a revival in the U.S. automobile market as being the key variable for the continuing growth of Satellite Radio. Citadel is expecting U.S. vehicle sales to rocket from 11.6 million in 2010 to 16 million in 2015, which would translate into 27.8 million Sirius XM subscribers by 2015. Citadel also sees a “a large and growing base of satellite radio-enabled vehicles entering the used car market.” They estimate that Sirius XM is already actively targeting 4 million certified pre-owned vehicles annually, and that number is expected to grow. It was also noted that the subscriber acquisition costs in the used market were negligible, as the hardware is already installed. Citadel expects there to be over 75 million vehicles on the road with Satellite Radio installed within the next five years.
Citadel is projecting PPA revenues of $4.5 billion, EBITDA of $1.5 billion, and reported FCF of $1.6 billion in 2015, representing a five-year CAGR of 10%, 22% and 65%, respectively. Citadel’s 2011 year-end valuation of $2.00 is based on a discounted cash flow methodology, factoring in a WACC of 8.5% and terminal growth rate of 1%.
Disclosure: Long SIRI
Contact the author: DemianRussian@SatelliteRadioPlayground.com
