By Demian Russian
BGB Securities media analyst Murray Arenson issued a new research report on the heels of Sirius XM Radio’s (NASDAQ:SIRI) Q1 results, reiterating his BUY rating and raising his price target on the equity from $2.00 to $2.40. Arenson previously upgraded his rating on SIRI from HOLD to BUY and his price target from $1.50 to $2.00 on February 16th, following the company’s Q4 results.
Sirius posted a solid quarter, with adjusted EBITDA exceeding expectations, though revenues fell a little short. The company raised its 2011 FCF forecast, while reaffirming all other metrics. While near term visibility faces minor challenges related to the effect of the Japan disaster on the new vehicle supply chain, Sirius re-asserted its strong outlook, highlighting the leverage to cash flows in its model, its probable plans to raise prices, and the likelihood of returning capital to shareholders.
– Murray Arenson, BGB Securities
Arenson noted Sirius XM’s EBITDA margins had reached a record 24.9% in the first quarter and should eventually expand to 40% according to management’s comments. In light of management’s comments that its growing cash balance should easily top $1 billion in 2012, Arenson is suspecting the return of capital to shareholders in the form of share buybacks.
While noting that Sirius XM’s Q1 reported net subscriber editions of 373k was in line with his 360k estimate, along with reported churn of 2.0%, Arenson noted that reported SAC of $57 beat his $59 estimate. While he did note that reported ARPU of $11.52 came in slightly below his $11.66 estimate, he said that “the delta was largely attributable to promotional activity” and that the quarter-over-quarter drop from Q4′s reported ARPU of $11.80 was impacted by the recent reduction in the royalty recovery pass-through fee from $1.98 to $1.40 on primary subscriptions.
Arenson expects the FCC to lift merger related pricing restrictions on the company, as the three-year price freeze expires, and expects management to implement a “nominal price increase” and a likely “repackaging of service options.” Arenson expects these pricing moves to benefit ARPU gradually in the short term, but become more meaningful next year and beyond.
Arenson updated his valuation analysis, looking at SIRI’s valuation on a per subscriber basis of $705 based on 2012 assumptions, which takes into account SAC required for long term growth and incorporating the value of the company’s ~$8 billion in NOLS, as well as looking at FCF on a fully taxed basis.
For full year 2011, Arenson now expects the company to generate $3.0 billion in revenue, $733 million in adjusted EBITDA, and $358 million in FCF. Looking out to 2012, he expects $3.3 billion in revenue, $869 million in adjusted EBITDA, and $473 million in FCF.
BGB Securities media analyst Murray Arenson will be returning as a special guest on the Wednesday, May 11th episode of Playground Radio for an exclusive, live interview.
Murray Arenson, BGB Securities Media Analyst
Murray Arenson has covered the Media and Media Technology Industries for more than twelve years and worked for Nielsen Media Research, the media industry’s leading research company, prior to joining the financial ranks.
Mr. Arenson is a two-time Wall Street Journal All-Star Analyst, including a ranking as the Number One analyst in the Cable and Entertainment industry and a position on the Wall Street Journal’s Home-Run Hitters Team (ranking No. 4 among analysts in all industries with highest portfolio returns).
Mr. Arenson has been widely quoted in trade, financial, and general media, including CNBC, Investor’s Business Daily, New York NewsDay, Los Angeles Times, Bloomberg News, Cable World and MultiChannel News. Mr. Arenson was previously an analyst with Ferris, Baker Watts, Inc. Prior to that, he was the President of Mosaic Equity L.L.C., an independent research firm serving institutional investors. He has also been an analyst with Morgan Keegan & Company, Hoak Breedlove Wesneski & Co., and Rauscher Pierce Refsnes, Inc. Mr. Arenson received an M.B.A. from Southern Methodist University and a B.A. from Washington University.
Playground Radio can be heard live every Wednesday night at 8:00PM Eastern. Previous episodes, including previous Playground Radio interviews with Murray Arenson, are also available to be streamed or downloaded. Further information about Playground Radio, including an updated programming schedule, can be found at the Playground Radio Home Page. The Wednesday, May 11th edition of Playground Radio featuring Murray Arenson will be available to be streamed live at the following link:
Disclosure: Long SIRI
Contact the author: DemianRussian@SatelliteRadioPlayground.com
How can he only expect 473m in cashflow for next year? I feel like even without a price increase they could hit atleast 500…700-800 with a price increase…just my opinion
Sirius is a discretionary service that is not for everybody and unlikely will be unless they introduce free service with limited music channels with commercials similar to Pandora where you will be able to customize to some degree. This could become possible with sat radio 2.0. Although their monthly fee is ridiculously inexpensive, there is still a very large cross-section of the population at any given time in this country that will not sign up for all kinds of reasons. This group encompasses people with low income and students who cannot afford to pay even $15/month as well as misers who won’t pay for anything, in particular, if there are, though inferior, but still free alternatives. You can come across the latter in any field. However, there are about fifty million people in this country who will most likely subscribe and may have more than one subscription. This is why I estimate Sirius’ “capacity” within the next fifteen years at about seventy five (75) million subscriptions. The number may be even greater if the economy does well; and we also need to account for the population growth. But let us limit ourselves to 75 million subscriptions (not subscribers) for the sake of argument. There is still plenty of growth. In addition, when both services truly merge, Sirius will have free capacity that it could use for other purposes. Satellites have tremendous scope of uses and the company may get into areas we may not even imagine at the moment.
I can see Sirius adding easily another ten million subs by 2017. If we assume conservatively that they have about 31 million subs by 2017 and annual ARPU is about $170 per customer, we have about $5.3 billion revenue in 2016, with EBIDTA at about $2.7B and fcf at $2.4B. The question is what multiple to apply. I believe that the company with such margins and growth deserves at least x 25 that brings us to $60 billion valuation. If they buy back 1 billion shares (about 3 billion float + 2 billion shares of liberty’s remaining 40%) by 2017, the stock will be valued at $12 per share. This is a very conservative assumption that does not account for the hype that could add another 50% to 100% bringing the stock to between $18 and 2$4 at the end of 2016.
I call Sirius a monopoly in the sense that there is not a single radio company that can compete with it on the same level playing field. Just imagine that there is only one luxury car and no others. How much money would the manufacturer be making? This is exactly what Sirius is: one and only “luxury” radio. I used quotes because Sirius is not a luxury by any means for the price they charge vs. the value. Also, I cannot see anyone realistically competing with Sirius in the auto or boat, plane and any other vehicle. Internet radio service in the auto is a joke because no one is going to read their banners while driving to risk their lives, or they will have to have voice ads and be like terrestrial radio. What is the appeal then? Plus sooner or later they will run into the issue of capacity and internet providers will have to start charging for usage.
Concerning near-term stock price, I see it doubling in 2011 and may be doubling again by 2014. Let me explain why. I have no doubt that the price freeze will be lifted and Karmazin will increase the price by $2 or maybe even $3. One may cry foul that they increased the price by 25%. So what? First, everybody does that. DTV and Comcast in particular as well as other sat and cable providers as well as mobile phone companies constantly raise prices and charge between one six hundred and three thousand annually, that is through the nose, and people do pay. Second, we are talking meager $2 or $3 dollars not $20 or $30 per month. Third, the core 17M subs will take the price increase in stride and will not budge like they never did with royalty fees introduction although analysts were predicting the end of the world. Why? Because the service will still be strikingly inexpensive compared to literally anything else you can think of vs. its value and they CAN AFFORD THAT. I believe the announcement of price freeze lift alone will add $.50 to the stock. Once they introduce the actual price increase, we can see another $1.50+ by the end of 2011 bringing the stock to $4 or maybe even higher. 2012 is the first year with radically lower capex, some increased pricing impact, and we will see stock appreciating very fast. Plus sometime between late 2011 and mid 2012 Karmazin will announce the share buyback plan. The stock will rocket both on the news and on the hype like it did when they announced HS moving to Sirius. Sat radio 2.0 may or may not be a contributor but if it is, we will see a significant improvement in the retail pool as well.
Of course, all my assumptions are based on economic improvement and no catastrophic events. As to the perennial question if Sirius will or will not be growing, it is time to put it to rest. It arises every quarter and the company disproves the doubting Thomases like it has done this past quarter. I believe that Sirius is at the very beginning of a true rise and the really good times are still ahead. The only thing that may interfere with the company is its purchase by Malone or other suitors. However, I just wonder where Malone is going to get $16+ billion ($4/share x 4 billion float in early 2012). I hope very much that this will not happen because Sirius will be a stellar company on its own.
VI, i agree.. this stock will pop on the news of share buy back…just like it popped in 2004…and i agree that it will be better for siri investors if Siri stays standalone company like it is now..