Satellite Radio Playground

By Demian Russian

Citadel Securities analyst Vijay Jayant issues a new research report on Sirius XM Radio (NASDAQ:SIRI) and reiterates his previous NEUTRAL rating, but bumps his price target up from $2.00 to $2.25. Jayant had previously reiterated his NEUTRAL rating and then $2.00 price target following Sirius XM’s Q1 results.

While valuations appear full, one of the key drivers of near-term share prices will be the timing and impact of the Japanese earthquake on SAAR levels. If auto market trends at that time suggest 2H11 recovery may be faster, we think there is scope for further appreciation.

– Vijay Jayant, Citadel Securities

While Jayant views year-to-date SAAR trends suggesting full-year U.S. vehicle sales could top 13 million, he believes that Japanese manufacturers could face shortages this summer. While noting that the potential impact from the earthquake in Japan on supply chains is difficult to handicap, he believes that Sirius XM’s margins may be lower in the back half of the year as SAC charges may increase with a strong recovery late in the third quarter due to U.S. auto makers increasing production in an attempt to gain market share. Jayant also believes that full-year revenues could also be impacted as these subscriber’s contribution to revenue begins later in the year. Based on current SAAR trends, Jayant is projecting full-year 2011 auto sales of 12.8 million and believes that Sirius XM will add 1.5 million net new subscribers for the year, slightly ahead of management’s guidance of 1.4 million. 

While Sirius XM has agreed to not raise prices for the remainder of 2011 pursuant to the recent settlement of the Carl Blessing et al. v. Sirius XM Radio Inc. lawsuit, Jayant believes Sirius XM will begin raising prices in 2012 higher than the inflation rate. After the initial rate increase, he expects Sirius XM to continue to raise rates annually, not unlike other subscription based businesses such as the cable and satellite television service providers. While Jaynant sees Sirius XM aggressively raising prices next year, he doesn’t expect Sirius XM to aggressively go after customers to extend subscription contracts at current prices, as this would have the impact of increasing deferred revenues and FCF.

Jayant expects Sirius XM to return capital to equity owners, but not until after March of 2012 as there are tax-related restrictions limiting how much of the company’s stock could be bought back prior to that date. While he believes that Sirius XM could aggressively begin buying back its stock after March 2012, he also notes that,”Sirius XM expects that by 2013, its return of capital to shareholders could be limited by restrictive payments tests in its debt covenants.” At year-end 2012, Jayant estimates that Sirius XM will have $2.5 billion in debt that will come due in the 2013-2018 time period, in addition to $550 million of in-the-money convertible debt, and a debt-to-EBITDA ratio of 2.3x — below its 3x target. Jayant expects Sirius XM to refinance its debt, depending on the condition of the capital market at the time, to free itself of the restrictive covenants which put limits on the returning of capital to shareholders.

Commenting on the Howard Stern lawsuit against Sirius XM, Jayant warns that even though Sirius XM views the lawsuit as having no merit and has sought summary judgment, the whole process could take up to another year to settle — even an expedited process. He maintains that the worse case scenario for Sirius XM would be a $0.04/share hit.

Vijay Jayant expects full-year 2011 PPA revenues of $3.05 billion, PPA Adjusted EBITDA of $725 million, and FCF of $370 million, all above Sirius XM management’s guidance. While his DCF model yields a year-end 2011 “fair value” of $2.25 a share, Jayant noted, “We believe the share prices likely will respond more to changes in SAAR levels than on underlying fundamental trends in the near term.”

Disclosure: Long SIRI

Contact the author: DemianRussian@SatelliteRadioPlayground.com