By Demian Russian
In response to Sirius XM Radio’s (NASDAQ:SIRI) fourth quarter 2010 results, Janco Partners Director of Research Vijay Singh upgrades the Satellite Radio service provider from ACCUMULATE to BUY and raises his price target to $2.10. Previously Singh had raised his price target to $1.54 following Sirius XM’s Q3 2010 results last November, but moved his rating from BUY to ACCUMULATE due to the recent appreciation in the stock price at the time. In his new report, Singh notes that Sirius XM is “rapidly becoming a strong free cash flow story.”
The company was able to grow their subscriber base and demonstrate the strength of their model in a less than desirable consumer environment. With the continued investment in quality content, declining capex, the launch of new technologies and the steady recovery of the U.S. auto market, we remain confident that Sirius XM is well positioned headed into 2011.
– Vijay Singh, Janco Partners Director of Research
Singh notes that while Sirius XM’s reported Q4 results were just below consensus estimates, the results were in-line with Janco’s estimates. “Much of the downside on the fourth quarter numbers was attributable to early pay offs of debt and restructuring charges, excluding these costs net income for the quarter would have been $64 million vs. the reported loss of $81 million,” Singh said.
Looking towards the future, Singh believes management has “reinforced their commitment to securing desirable content and investing in new technologies to enhance their customer experience.” In regards to content, he noted that the newly renegotiated contracts with the NFL and Howard Stern increases the “stability of their subscriber base.” He is encouraged by the anticipation surrounding the launch of Satellite Radio 2.0 later this year. Singh noted that Satellite Radio 2.0 will feature increased bandwidth, which will support more channels aimed at the Hispanic demographic. “The new offering will also come with exciting new functions that will improve the user interface and address the competitive threat that exists due to the arrival of streaming music services,” Singh said. He noted that Satellite Radio 2.0′s functionality will include the ability to “purchase, pause, record and playback music.”
Due to the fact that there will be no new satellites expected to be launched until 2016, after the launch of Sirius 6 this year, Singh sees capex declining sharply and providing Sirius XM management with the “flexibility to optimize the company’s capital structure.” He is expecting capex to decline $90 million in 2011 and $100 million in 2011.
We believe the continued investment in programming/technology, the recovery of the US auto market and the improving characteristics of the Sirius XM operating model will drive significant growth and profitability in 2011 and beyond.
– Vijay Singh, Janco Partners Director of Research
Singh believes that Sirius XM’s financial model has now achieved a “distinct level of predictability,” due to its recurring revenue stream and streamlined operating costs. Because of this, Singh now believes that in order to capture the true intrinsic value of Sirius XM, free cash flow needs to be discounted out over multiple years. Janco’s model now stretches out to 2015, calculating free cash flow for each year and then discounting it back using weighted average cost of capital of 8.9% as the discount rate. In addition, Singh takes into account the net present value of Sirius XM’s ~$8 billion on NOL’s.
Janco Partners Director of Research Vijay Singh will be the special guest on Playground Radio for a live, exclusive interview on Wednesday, March 2nd, 2011 at 8:00PM ET.
Disclosure: Long SIRI
Contact the author: DemianRussian@SatelliteRadioPlayground.com
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another upgrade !!!
how many is that now?
I cry foul if we pull back to the low 1.70s
I cry tears of joy when we surpass $2.00 !!
vijay singh plays golf