Satellite Radio Playground

By Demian Russian

In a newly issued research report from Wedge Partners Senior Equity Analyst Martin Pyykkonen (formerly of Janco Partners), the veteran analyst lays out his case for why Sirius XM Radio’s (NASDAQ:SIRI) EBITDA margin can reach the mid-30% range by the 2014-2015 timeframe. Pyykkonen also estimates that EBITDA-to-FCF conversion will increase to >90% in that same timeframe. He sees this performance possible as the company’s capex spending is reduced to maintenance levels of only ~$50 million a year through at least 2017. He also sees “a much improved debt profile that should be serviceable under the current levered FCF outlook.”

We think SIRI has some upside pricing leverage as subscription rates can be increased in mid-summer of this year, after passing a three year period since the merger of Sirius and XM. The combined platforms’ content has increased which could result in favorable price/demand elasticity for SIRI. While music only subscriptions may face streaming services competition, we think SIRI’s comprehensive entertainment packages have some upside pricing leverage.

– Martin Pyykkonen, Wedge Partners Senior Equity Analyst

Noting that SIRI currently trades at ~14x Price/EBITDA and ~12x EV/EBITDA when looking at the 2011 mean EBITDA estimate on the street (fully diluted, including Liberty Media’s (NASDAQ:LCAPA) 40% stake), Pyykkonen sees upside potential to the street’s 2011 EBITDA estimate of $738 million, which he points out is relatively flat year-over-year with the street’s present 2010 EBITDA estimate.

Pyykkonen basis his upside estimates on what he sees as “prominent drivers over the next two years.” Those drivers include: higher subscriber growth (with conversion rates hitting 50% or higher and the SAAR returning to its historical average of 15-16 million), subscription price increases beginning this summer (allowed by the FCC after the three year anniversary of the merger), and continued penetration of the used vehicle market (via certified pre-owned dealers and private transactions).

While Pyykkonen currently estimates that Sirius XM’s conversion rate on new vehicles will remain in the 48%-49% range throughout 2011, he sees strong potential for Sirius XM to surpass a 50% conversion rate within the next year. He sees this possible due to the company’s continuing focus on programming, including the rehiring of Howard Stern, combined with an “improving macro outlook with more consumers willing to pay for the service after the initial trial period.” Read More