Satellite Radio Playground

By Demian Russian

Following the Sirius XM Radio (NASDAQ:SIRI) antitrust lawsuit settlement, Maxim Group Senior Media Analyst John Tinker issued a new research report today reiterating his BUY rating and $2.50 price target on Sirius XM Radio (NASDAQ:SIRI). Tinker had last reiterated his BUY rating, and raised his price target from $2.20 to $2.50, following the company’s first quarter results.

The delay pushes out but does not destroy the pricing power and quality of franchise that SIRI possesses.

– John Tinker, Maxim Group

Commenting on the recent settlement of the Carl Blessing antitrust lawsuit, Tinker notes that as a result of the settlement Sirius XM is now restricted from raising prices between July 28th, 2011, when the price freeze as a condition of the merger expires, and December 31st, 2011, as well as obligated to provide previous subscribers who have cancelled with the ability to reactivate without a fee and receive one free month subscription. In contrast to some inaccurate news reporting out there, Tinker attributes no upside benefit to Sirius XM’s subscriber base because of this, maintaining his previous 2011 net new subscriber estimate of 1.5 million based on 13.1 million in annual U.S. vehicle sales. 

In response to Sirius XM’s restrictions and obligations as a result of the settlement, Tinker reduced his Q4 ARPU estimate by $1.00 from $12.81 to $11.81. In tandem, he also reduced his 2011 year-end estimates for revenues, by $56 million to $3.048 billion, and EBITDA, by $40 million to $735 million. Current 2011 EBITDA consensus is $735 million, above management’s guidance for $715 million. Along with these estimate reductions, Tinker also raised his multiple from 15.8x to 16.5x. “We believe that the price increase aspect to the SIRI investment thesis is still intact as the company admitted no wrongdoing,” noted Tinker.

Tinker sees potential “bundling” as part of a price increase, noting that the current streaming feed at $2.99 a month to basic subscribers could be bundled into one package, as well as additional services such as Sirius Traffic and Sirius Travel Link. Tinker is assuming a 70% contribution margin on a price increase.

Noting that by law Sirius XM must give a 60 day notice for any price increase, Tinker quotes a clause in the 8k filed on Monday which states, “Existing subscribers will be allowed to renew their current subscription plans at our current rates prior to December 31, 2011.” Tinker points to the clause as being factually correct in that “subscribers can always elect to extend their contract – similar to a magazine subscription.” Tinker adds, “A surge by subscribers to renew their contracts may not be the worst outcome.”

Tinker maintains his assumption that Sirius XM will buy back $500 million of its stock in 2012, as the company approaches an EBITDA to net debt ratio of 3x — and he estimates that ratio falling to 1.7x by year-end 2012. “The timing might be affected by Liberty Capital (NASDAQ:LCAPA) not tendering, and thereby inexpensively increasing their 40% stake. There are issues about wanting to use the $8B NOL, and not triggering a Section 382 ownership change,” Tinker added.

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

Playground Radio — John Tinker, Maxim Group Senior Media Analyst

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