By Relmor Demitrius
Greg Maffei
Sirius XM Radio (NASDAQ:SIRI) is offered many opinions of what their shares are actually worth. It just depends on who you listen too. There seems to be a vastly different view of just how much one should pay for this equity and ultimately what is their appropriate market cap. If readers know my style, they know I do not work with subjectives or opinions. I like cold hard facts when I tackle a problem. The pulse of the investor community seems to be right now on trying to understand how an equity so obviously undervalued is still priced at $1 a share. What is Sirius XM’s real fair value? Well why waste a second longer, let us begin.
Without boring anyone on just how dangerous it is to attempt to use the stock market current price at any one time to try to determine actual retail sale value of a company and hence what one share is actually worth in reality (meaning if every share were to be purchased at one time, at what price could they buy the company) might offer a little insight. Here is a good example of this from 2008.
When Microsoft (NASDAQ:MSFT) in 2008 offered $34 a share for Yahoo Inc. (NASDAQ:YHOO), the current range of the stock at the time was around $30 to $20 a share. Why then offer $34? Seeing the end result of the fiasco one already knows the answer to that. The offer wasn’t even accepted. Jerry Yang knew his company was worth more than what it traded. Microsoft knew this as well, obviously. They knew the stock was trading at $20 a share. So technically the stock market on that day is valuing Yahoo, Inc. at $18 a share. That is in the end what Microsoft would have to pay to acquire Yahoo. Its called a tender offer. A broad offer to all stockholders. This is a great example of where a stock is trading and its reality. After Microsoft announced the tender offer, Yahoo, Inc. stock skyrocketed. Someone huge and respected, Microsoft, saw the company as grossly undervalued. If all shares held are worth $34 a share then that’s where the price would immediately go. It usually trades just under the offer or as strongly to the offer as seemed reasonable the validity of the offer being accepted. Upon immediate approval of the tender offer for the company the stock would go directly to $34 and probably trade within 1% of that price until the actual deed (then the stock would cease trading). Anyone holding shares upon that day would receive the tender offer price. This is but one of thousands of examples of a tender offer moving a stocks price up significantly from where it was currently trading. Regardless of Microsoft later pulling the bid when they saw trouble in the markets, for over a months time they valued it still much higher than it would have been trading otherwise.
With this in mind, lets make a logical case for what Sirius XM’s true sale value is at the moment. What would AT&T for instance offer Mel Karmazin(CEO of Sirius XM Radio) for the entire company? Liberty Media (NASDAQ:LINTA) owns 40% of the company, would obviously have a say in this as well. It would come down to a board vote, with Mel Karmazin’s opinion as well as Greg Maffei (CEO of Liberty Media) mattering the most. Liberty Capital (NASDAQ:LCAPA) is the tracking stock in which the 40% Sirius XM holding can be found. If representatives of AT&T contacted these 2 CEO’s of interest, what would he offer them to get a yes vote? What method of evaluation would he use?
Notice no where in my above example with AT&T did I mention the current trading price of Sirius XM Radio. Why? Because to a buyer it’s not really relevant. It is useful and I’m sure they would look at it, but I don’t know if they would even risk insulting Maffei and Karmazin with an offer for market value. That might just get you hung up on and the line blocked from that number for future use. Why would I say that? Isn’t $1 a fair price for Sirius XM? Doesn’t J.P. Morgan have a $1.05 price target on the stock? So there is at least one supposedly honest reputable opinion out there on their value near current trading value. Well careful whose opinion you believe. S&P, which doesn’t sell Sirius XM debt, has a $1.50 price target on it, other analysts have more, some less. In the end these are all just 1 year price targets and not really even in that capacity reflecting in true sale value. There are still useful evaluation methods used here we can draw from. Let’s use a few methods from S&P’s Sirius XM analyst Tuna Amobi. He uses EBITDA as a base evaluation method with an 18 times multiplier. This is the estimated value of the subscriber base. There are other areas of value that need to be mentioned as well.
There are 8 billion dollars in taxable write offs, called NOLs, that are as good as money as long as the company makes a profit and needs them. These have an approximate value of over 3 billion dollars. Since Sirius XM is now profitable during the worst economic conditions in decades we will assume these will all eventually be used. Since Liberty Media has mentioned the importance of the value of these before we can safely use them in any evaluation model.
Sirius XM has 3 billion in value from NOL’s. This is the reason Liberty Media will not be adding to more than 50% before August of 2011. They need to allow 3 years to pass to satisfy change of ownership rules regarding use of the NOL’s. They would be damaged if Liberty Media upped their stack to 50% or more before then. So if you ever hear this silly rumor, squash it immediately. Liberty Media will not add more control before August of 2011.
Sirius XM’s bandwidth is listed as valued at 2 billion dollars. I think this is grossly undervalued on their balance sheet. But we will hold it here as that is all Sirius XM is listing it as. I believe its worth closer to 6 billion or more.
Sirius XM is projecting year end EBITDA at $575 million. Mel isn’t going to tell you but I will. Remember Walter Mondale in the 1984 presidential election. Reagan isn’t going to tell you he is going to raise taxes, but I will. Mel isn’t going to tell you that his EBITDA guidance is way low, but I will. I don’t mean off by $10 million, I mean off by over $100 million. That’s correct, Sirius XM end year guidance on adjusted EBITDA is being under forecasted by around 20%. If you use an 18 multiplier (heck Tuna Amobi, analyst for one of the most respected rating agencies in the country uses it) and using $700 million (my estimate) EBTIDA you get $1.93 EV. Tuna is only using what Sirius XM has as their estimate for the year, which will be way off, and hence why his estimate is around $1.50 for that value. He is assigning around $650 to $700 in value per subscriber. So take $1.93 as value of the subscribers alone. This is your core revenue stream value. This accounts for no price increases which is coming in around 1 year now too. This also accounts for no continued improvements in cost savings, ARPU, or increasing subscriber totals. This is only for CURRENT subscriber totals, not even end of year projections. This is low ball stuff here. Sirius XM has stated themselves that revenue would grow by 20%. So an 18 multiplier on a high growth company is not unusual. EBITDA is a common method of evaluation as well. Well hold on a second. Did we forget something? O yes…..
Sirius XM has 3.1 billion in long term debt, 150 million left in capital expenditures and probably 200 million in interest payments left to deal with before that debt would probably be removed. So that’s 3.45 billion dollars of liability over operating income. Sirius XM will have to come up with 3.45 billion in earned cash before any value can come to their common shares. No problem. They have 5 billion in value alone from their licenses and NOL’s and let’s give them 7 billion in synergies (more like 8 billion but let’s be nice to the shorts and not scare them too much, and go with 7). I didn’t even mention the land they own, the repeaters they use, or the satellites launched and in the air. Let’s assume all that stuff is tied directly to the use of satellite radio and has no transferable value. Even though the end user of the company would enjoy the use of this network and need it to allow the company to function, let’s be demons here and still give it no value. Why? I don’t know, maybe I feel a little ornery today. Who knows. Maybe I feel like getting a little crazy. So now that we have all the numbers and facts we need let’s attach a value someone like AT&T might use to formulate a price offer for the company.
$3 Billion NOL value.
$7 billion in yet realized synergies.
$2 Billion Licenses.
$12.6 billion in subscriber value(steady revenue)
Remove $3.45 billion in interest, long term debt, and capital expenditures.
That gives us a fair value currently of $21.15 billion. Let’s of course use full dilution(6.5 billion shares), as we always do when being diligent and you get a fair share value of $3.25. (Edited from an error a commentor brought to my attention. I also forgot to add in the synergies, so I was a little low on my first estimate. I apologize. Not 8 billion in NOL value, only 3 billion.
Sounds fair to me. I would accept that offer tomorrow for my shares. Probably not a penny less. As I demonstrated the actual value of the company is probably a lot more than this. Before the merger the combined companies were valued at 12 billion dollars combined and that was in far worse condition with much fewer subscribers, no royalty charges, and no reworked GM deal among a hundred other synergies and improvements not yet realized.
Maybe 500 million of the synergies maximum have been realized already, but that would still leave consolidation of spectrum, reworked OEM contracts (GM rework appears to be saving them around 7 million dollars a quarter, and that’s just one contract so far), reworked talent contracts, combining use of one satellite system (all synergies mentioned by Maffei as goals) and many other synergies combining the companies will realize at one point in the future. So
So why is Sirius XM currently valued at $1 right now? Because everyday under 100 million shares of 3.9 billion of the float get traded around like pong until more and more people realize what we all do now, or someone actually attempts to purchase a large amount of shares or makes an offer for the company. Until that happens these things take time. You don’t go from wall street punch line, where you have bankruptcy rumors just 1 and a half years ago to wall street darling just one year later. Perception of value is all that matters on any one day on wall street and right now there seems to be a massive misperception of value when dealing with this company. Not saying the stock should jump to $3 tomorrow, of course not. I know how the game works. Institutions, market makers, and traders will have their say on when and how it gets there, but I have no doubt that that is exactly where this stock is heading.
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Disclosure: Long SIRI
Thanks, Relmor, for this extremely well written and thorough analysis if the underlying values within SIRI. I really appreciate the way you have laid this all out and agree 100% with your conclusions. SIRI is a great Risk/Reward investment at current levels – as downside exposure is a fraction of indicated upside potential into 2011 and beyond. There is absolutely no doubt – in my mind – that the intrinsic values you have identified will be realized eventually – either by Liberty in a buyout, or some other major suitor in the media industry. Given the current nervousness in the overall equity markets, SIRI should hold relatively firm and displaying better relative strength than the Indices while this all plays out – and it should take some patience on the part of investors – but entry levels near 1.00 should turn out to be great investments over time. With interest rates near zero – and a scarcity of other attractive alternatives – institutions should take a real serious look at SIRI – and your excellent article above should definitely attract their attention.
thanks for your analysis – i have spoken to some siri people and their comment, with a gleam in their eye was siri is a very viable financial medium – maybe you could shine a bit of light into bpth current google capabilites/threats, value to someone like apple/netflix, ….i also wonder about the huge potential up-take for the hand-held market
awesome article thanks…ive been talking about the Bandwith value for awhile and hardly anyone writes about it,,so glad you did,,…that Bandwith like you said is worth a fortune..and its an asset that we sometimes take for granted
Very nice analysis! I appreciate it,
Long life to sirius XM
Relmor,
I believe you outdid yourself. This is simply the brightest piece I have ever read about siri!!! You have touched upon the most important subject that has been dismissed by default practically by everybody. There are some details that could be put under scrutiny like already realized synergies (I believe they could be as high as $1B) but they are negligible in light of the overall stroke of a master. The post is so long overdue and is convincingly factual. I also believe that siri’s upcoming results in the next 2 to 4 quarters will undoubtedly contribute to the change in the company and consequently stock perception. This is simply a matter of time. Siri is a sleeping giant that is awakening right in front of us and its explosive growth will be remarkable for reasons that are obvious to those who have followed the company and its predecessors for the past seven years.
Fantastic article. I agree on all levels, I would be interested in seeing thestreet or motley fool respond to this article or I would like to see JP Morgan respond to the article. It makes sense, but what we really need is for someone big to buy-in to it.
was Advertising and retail sales included?
Also what about expenses like sat launching costs, maintenance costs, rent, operating, large contracts, employees, advertising, distribution, factories, etc.
Still agree Siri is so undervalued, and people with patience shall be rewarded. 2011 will be a great year.
Costs are accounted for. Read again.
Why you use EBITDA as a EV method, its OVER COSTS. Large contracts? Once again, ill repeat….
EBITDA IS OVER COSTS. COSTS ARE WHAT YOU MENTIONED. When your profitable, only thing that matters is profit margin, ebitda, fcf, earnings, etc…
Now, capex is not accounted for in that, hence why I listed it. Also Interest on debt, and long term debt as well.
A few maths errors in your analysis ($3B + 150M + $200M is $3.35 not $3.45, if Yahoo is trading at $20 how is it market making it worth $18?) but the overall methodology and analysis is sound. Have followed the company since inception and its triumphs and travails. It’ll be interesting to see how long it takes before the market takes it out of its current range.
Love the way you break it down. It does amaze me that this stock isn’t moving at all.
… a lot of investors are engaged in SIRI with different interests. What about Goldman Sachs?
It is a monoply…that has to be worth something?
Relmore,
One of your good articles.
One question: You put NOLs as adding $8 Billion to the value of the company. But the real benefit of this figure is the taxes it saves on future profits, not the NOL amount itself.
Assuming 30% tas rate, the benefit this 48 Billion will fetch is about $2.4 billion.
Is this correct or did I miss something?
Typos typos….
“the benefit this $8 Billion with fetch is about $2.4 Billion”
8 billion in tax benefit, not 8 billion inprofits.
Sorry, no typo. I did change the 3.45, added it to 3.1 billion plus 100 plus 250 to make you happy.
Thank you.
About 20 billion in profits they would use to be tax free, representing about 8 billion inNOLS.
ill be waiting for you to correct your type now. Or were you just bashing to bash? With longs like you who needs enemies. LOL
AHASHAHAHAH
Relmore,
I think you misunderstood me when i wrote “Typos…”
I was correcting my own typo in my first post, where I wrote “the benefit this 48 Billion will fetch is about $2.4 billion”. Missed the Shift key while typing the $ sign and typed 4 instead. So it read 48 Billion, instead of $8 Billion.
Coming back to my question.
Do they have 8 Billion in LOSSES that they can use against future Taxes
OR
Do they have 8 Billion in Tax benefits that they will reap from the NOLs?
The way I read NOLs was that they are like capital losses. If I lose 1K in stock market, I dont get 1K cash back when i file my taxes. I get about $300, which the tax I saved.
I totally agree with you Relmor and I also do think this is an excellent analysis… The big question however to ask is why isn’t SIRI at least moving in the right direction?… It has reached a high of $1.25 around 6 months ago and with even great news in the last quarterly report, the stock is either dropping or stuck at same levels… Is it possibly manipulated?
If such a powerful stock, why has it not moved in 6 months?
Short interest, negative media spin, MMs trying to make money on short sales, etc.
And as Sheree said, it moved 25% up to a high in May. How is that not moving?
The stock reached a high of 1.25 on May 3, 2010. That was a little over 3 months ago not 6 months. :/
i think fair value is closer to 6 bandwidth is worth more satellites are worth more and the debt is over rated and don’t forget they will raise prices next year.l
I am impressed with the article. SIRI is a great “Risk Play” right now. I’m probably going to buy more if it hangs in the .90′s for much longer as well. Keep up the great research and thank you for the insight.
The thing is that it is not even a risky play- The only risk is if the economy dips in a double dip recession which will not happen- the future of siri has never been brighter.
Hoping, it would be more like this, if you made $1k in the stock market and had nol’s of $1k, the nol would cancel out the gain. You wouldn’t owe taxes on the gain.
Rigth Sheree,
Thats why I say the real value of that 1K in future is not 1K, its the amount of tax I save on that. So the value of 8B NOLs to a company is not 8B, its more like 2.4B which is roughly the money they will save .
Sorry hoping, I didn’t realize that is what rel was saying and I got a bit confused with your wording of the losses. I’m all clear now and glad we are all on the same page!
Great news and remember what Mel said he will not sell unless the price is in double digits so we are looking at least at $10.00 a share.
Tender offers are always above fair book value of the company so let say the book value is $3.00 a share expect $4 to $5 offer.
With more positive news the book value increases and so does the tender offer and let’s not forget there can be a bidding war going on with Google.
Rel, you have raised the “reporting bar” several notches above others trying to cover this stock. A very well written analysis, with excellent flow. Nicely done!!!!
hoping,you are right,the value of the NOL’s is the tax savings from said instrument,with high corp tax rate of 38% i believe on billion in profit,it comes to 3.04 bil in value,which coincedentally equals sxm’s debt almost..so uncle sam itself will pay off the debt imo..of course it was capital paid in that was lost too..but that is on the backs of previous investors imo..
Thanks Johnny!
so when Relmore says
“$8 Billion NOL
$2 Billion Licenses.
$12.6 billion in subscriber value(steady revenue)
Remove $3.45 billion in interest, long term debt, and capital expenditures.
That gives us a fair value currently of $19.15 billion. Let’s of course use full dilution(6.5 billion shares), as we always do when being diligent and you get a fair share value of $2.94.
”
Do we need to $8 Billion NOL to about $3 Billion tax savings from NOLs? and does it change the fair value from $19.15 Billion to $14.15 billion and hence a fair share value from $2.94 to $2.18 ?
That was the whole point I wanted to raise when I was tagged a basher and an enemy
Just wanted to make sure Relmore has not miscalculated anything in one of his best articles ever!
Thanks irish. Thats fine. Simply move 4 billion in synergies over that I left off and my 2.94 price stays. If I get more pissed, Im going to add all of them. LOL AHAHAHA
NOL’s have a cash value of around 3 billion or more. Good enough. Thanks Hoping, I understood it wrong.
O god help us if I did that!! Fine, you did go and piss me off. I appreciate you trying to have me get it right, really I do, and I will edit the article, but go ahead and add 7.5 billion in yet realized synergies, and now you have 22 billion instead of 19. So over $3 a share. Thanks. See, I was being nice to the shorters, but I guess I cant be now. LOL
Simplistic view of taxes,as the interest is almost 400 mil a year on debt,but going down as we pay it off too…but this is a write off of profits also..
Rel,this is your best work yet,keep it coming,imo
Thanks Rel,
I know your estimate was a very conservative one and you were being nice to shorters (I wonder why
), just wanted to clear my doubts and make sure a great article on SIRI does not have any scope for shorts to attack it.
Now I’ll be the happiest person if you added ALL the synergies and some more to calculate the fair value. didnt those guys once write about the debt being $9 Billion in one of their bash pieces? they used cumulative debt over the last 10 years to scare the investors away, you can very well use ALL the synergies over the next 10 years to scare the shorts aaway
)
lol…
$3.25..Yippee…
I’m holding atleast 90% of my 120K shares until we are closer to this figure.
Ya hoping I dont want the shorts too scared. LOL
Has to be a little surprise you know. HEHEHE
Buy out at $12.00.
CUT THE BULL WE KNOW IT’S HAPPENING.
LAHELM
“Know”, huh? Care to share your source of knowledge? As much as we hate shorts here, pumpers are also frowned upon. I think a lot of us would be happy with a $12 offer, but let’s provide reasons it’ll happen, yes?
I like this…keep coming back and getting a higher value!!!! $3.24!!! Now that is what I am talking about! Great read!
Wonderful news for us longs that have stayed the course, some shares down to 14 cents (also purchased a bunch for a ROTH at that price). Finally a great article from someone that totally makes sense, seems unbiased and has plenty of facts. I am definitely adding this site to my list of guru’s.
Relmor – Why hasn’t Seeking Alpha picked this article up for distribution? This definitely should be given wider coverage. With SIRI continuing to be stuck in narrow trading ranges around 1.00 – your excellent analysis might be just the thing to generate increased institutional interest and investment in the stock going forward.
Dear Rel – a Glaring question i have as a SIRI investor – if there is this huge latent value in SIRI why has there not been ONE single insider buy ….that doesnt jibe with the value and potential i imagine, and that you have delineated ….thanks again
Texd,why would an insider spend his own money to buy Siri shares when the board and officer’s have been given a boatload everytime us shareholders turn around,come on, really!!!! jmo]
Have you been reading the filings the last year,Mel got 120 mil,rest of board got over 120 mil combined,i beleive,excercised over the next 4 years in yearly installments…
SIRI is probably the funniest stock in the world, their chart is a joke due to very high manipulation.
Their market capitalization is 4 billion, not too bad for a company that has Howard Sterns at the center of its business model.
Texd, you are so right… Even at a $1 insiders won’t buy their own stocks. Can you imagine what will happen if an insider bought a 1,000,000 shares? But probably will never happen, I guess there are more bad news with this stock, and they don’t even feel that it’s worth a $1.
Buy out at least at $12.00 read my previous post.
Buy outs are always above fair value so if fair value is $3.00 the tender offer will be around $4-5.
If the fair value rises so will the tender offer.
Mel said he will not sell unless offer is in the double digits.
Don’t be surprised if Google and others have a bidding war.
Lahelm
ESL, When did Mel say this? I always listen to Mel because he almost always delivers…somehow I must have missed this statement and would like to have a record of it…thanks.
This was the first article of all articles posted that states it plain and simple. Valuation and what some would pay. Then the benefits to all accountings areas. What I don’t understand is why is Sirrus considered as an only a U.S. business? In all countries visited, the more restrictive the travel the more valuable the airwaves are. In Vietnam, cell phones are the only way to go. there is no infer structure. Thosands of powerlines and old sytem phone lines hang on poles. 75 foot Transmission towers that have a line of sight of 22 miles reach far. Satelites reach the whole country. India, China. in the last 10 years, look at bicycles replaced by autos and what do the drivers listen to? Hey, radio content is one thing. The transmission capabilities are incredable. Did you know you can “Lojack” a car location thru Sirrus? DO you think that U.S. rental cars know your speed? Data links are the future. At under $5 Sirrus is a steal. For those in the 80-90′s that bought in early….remember the value of a 8081 computer? SIRI value is what you believe the potential of the company is…and quite frankly, the NOL’s aren’t chump change..
i love siri as an investment – however, i feel like insiders (and not just the ceo) would be mortaging everything and laoding up, if it were worth 3x, or 12 times this price …… i certainly wouuld = we’ll see …….PADI, you are a thinly veiled basher
My dear friend!
What you are sying is a joke. The insiders are loaded with tons of options and they do not need to buy anything. Karmazin alone is loaded with over 100M options that will vest during a three year period.
Once the options vest, they buy and sell or they lose their options. They do not need to buy anyhting Plus you need to be extremely careful nowadays with insider buys.
Do not disseminate cheap rumors, my dear friend.
You are essentially looking at early 90′s technology here. A 4Mb link in one direction, and a lot of car makers who simply don’t know any better. Very few new signups and more often than not new car buyers are not renewing the subscriptions.
It is essentially dead tech and given the ipod, podcasting, and with the eventuality of FM going full digital they will die as soon as the new car makers drop them, and I would only think it would take a few to start the slide.
If SatRad is dead tech, what does that make AM/FM? And yet people are still using it.
Because it is free.
DSQE – If you had knowledge of the actual numbers (listened to the last conference call) you would know your 2nd sentence is absolutely incorrect. It’s the opposite. There were MORE subscribers and LOWER non-renewals.
I hope you are right, because for one I don’t often believe what I hear on conference calls.
I think the trip down to a nickel was done with manipulation from SXM’s debt holders, and now what is
left is a dead cat. If the company right sizes itself and nothing new comes down the pike you’ll maintain your dollar.
Are you kidding?! It’s all about content and delivery and there is absolutely no way terrestrial radio comes close to Sirius XM now – or at any time foreseeable in the future – on both these counts. Get real – with a 46% conversion rate, from free trials to paid subscriptions – an exceptionally high rate in any field where this business model has been used – it is absolutely clear that new car buyers prefer satellite radio to the old media of AM and FM, which has poor content and spotty transmission quality.