Satellite Radio Playground

By Demian Russian

James C. Goss

On the heels of Sirius XM Radio (NASDAQ:SIRI) CEO Mel Karmazin’s pre-announcement of Q4 2011 net subscriber additions, Barrington Research Associates Senior Investment Analyst covering the Media and Entertainment Industry, James C. Goss, reiterates his OUTPERFORM rating and upgrades his price target from $2.40 to $3.00.

Goss sees the recovering auto industry continuing to bring positive momentum to Sirius XM’s OEM-driven subscriber growth metrics. He expects gains to continue from not only the new auto channel, but also sees additional growth being derived from the company’s expanding initiatives in the used auto market as well, particularly from Certified Pre‐Owned auto sales programs related to high-end cars which target “a customer base possessing financial means and premium tastes.” Goss noted the benefits of lower SAC charges and room for growth in the used auto market. “We feel the effective rollout phase has many years to run, with the current share of autos having factory installed Satellite Radios now only 15% of the U.S. fleet,” Goss explained.

While Goss sees Sirius XM having now accomplished many important program contract negotiations, most notably the contract renewal with Howard Stern, and delivering on many of the cost saving synergies associated with the merger, he sees additional growth catalysts on the horizon with the implementation of the price increase in 2012, new programming and data services associated with the roll-out of Satellite Radio 2.0, and the chance of return of capital to shareholders out of rising free cash flow. Goss also notes improving investor perception regarding the company as a factor. “Perhaps most importantly, greater investor awareness of the viable fundamental story that has developed continues to shift investor mentality away from the highly risky state that used to dominate investor perceptions regarding this name,” Goss said

Noting Sirius XM’s improving financial metrics over the last three years, Goss points to the impressive move from a “15% worst-case borrowing rate” to present levels in the 7-8% range within a mere year and a half timeframe. Goss noted that the company’s debt rating has improved to being now only a couple of notches below investment grade.

While his 2012-based price target of $3.00 is based on a roughly 25x multiple to his 2012 EV/EBITDA estimates, Goss notes that an even more modest multiple assumption still would yield a price target upside north of 30%. “We expect interest in this story should continue to grow as management delivers on its financial and operational metrics, demonstrating that the substance of the turnaround story is real,” Goss said.

Barrington Research Associates Senior Investment Analyst covering the Media and Entertainment Industry, James C. Goss, will be returning as a special guest on an upcoming edition of Playground Radio.

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