Satellite Radio Playground

By Demian Russian

On the heels of Sirius XM Radio’s (NASDAQ:SIRI) first quarter results and conference call, Maxim Group Senior Media Analyst John Tinker issued a new research report reiterating a BUY rating and raising his price target on the equity from $2.20 to $2.50. Mr. Tinker previously upgraded his price target from $1.80 to $2.20 on February 16th following Sirius XM’s Q4 results.

Tinker cited Sirius XM reporting a 118% year-over-year increase in subscriber growth for the quarter. While noting that Q1 EBITDA of $181.4 million came in slightly below his estimate of $183 million, he notes that the consensus for $175 million was surpassed. Tinker believes that higher subscriber growth held back EBITDA growth in the quarter due to the associated SAC (Subscriber Acquisition Costs).

While noting that management indicated that full year guidance would have been raised if not for concerns regarding potential supply chain issues relating to the tragedy in Japan, Tinker said, “Ironically, a slow down from the company’s forecast of annual sub growth rate of 1.4M would increase their 2011 EBITDA guidance due to lower SAC” and noted that the company had maintained  full year 2011 EBITDA guidance of $715 million, even while raising FCF (Free Cash Flow) guidance $50 million, from $300 million to $350 million. 

Commenting on CEO Mel Karmazin’s comments during the Q1 conference call regarding pricing, Tinker noted that the company had “reaffirmed that it is seeking to raise prices to reflect their premium status after the FCC price freeze lapses at the end of July” and that Karmazin suggested that the price increase would be “higher than the inflation rate.” Tinker is now assuming a $1.00 price increase for the fourth quarter and lowered his 2012 subscriber growth rate forecast from 1.8 million to 1.6 million to reflect potential resistance to the price increase from new subscribers.

Tinker is maintaining his full year subscriber growth rate of 1.5 million in spite of the company’s Q1 beat, as he believes Q3 may not ramp as fast. He is still looking for a higher growth rate in 2012 as marketing to used car owners begins to ramp up combined with a higher estimated SAAR of 13.7 million.

Tinker assumes that Sirius XM will buy back $500 million of stock in 2012. While noting that in theory the company could have north of $2 billion of buying power in 2012, and that the ability to raise prices would have more of an immediate financial impact than a buyback, Tinker said, “The message sent by management that it is disciplined and focused is one that Wall Street rewards.”

While raising his price target from $2.20 to $2.50, Tinker also raised his full year 2011 EBITDA estimate from $740 million to $775 million, accounting for higher ARPU, and raised his full year 2012 EBITDA estimate from $940 million to $1,112 million, to reflect the full impact of a price increase. Tinker raised his FCF estimates to $388M for full year 2011 and $842M for full year 2012. “Our critical assumption in 2012 is that the EBITDA margin keeps expanding, helped by price increases, and generates a 43.5% growth rate,” said Tinker.

A recent Playground Radio interview with Maxim Group Senior Media Analyst John Tinker can be streamed at the following link:

Playground Radio — John Tinker, Maxim Group Senior Media Analyst

Disclosure: Long SIRI
Contact the author: DemianRussian@SatelliteRadioPlayground.com