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A Few Notes On Sirius XM


Relmor
  • Been a while since I used this communication form to discuss Sirius XM with our readers here. A lot has gone on, mostly good things obviously by the nice stock price run we have enjoyed over the last half of 2012 so far. What sparked this run? Why are we at 2.91 today? Doesn't matter, cause we are. Let other smaller people with more time on their hands play with that irrelevancy. What matters is where do we go from here. What can take us to 3.70 to 5 dollar range? What is 2013 guidance going to look like? When will they begin the buyback and how aggressive will it be? Who will be our next CEO? What is our 2013 fair value? What will the stock price be in 2013/2014 area?

By Relmor

Let's take a look at a few things and see if we can't summize the answer to some or all of the questions.

Some say we are on this run due to Liberty being forced to purchase shares on the open market. Some might say, well look at what the main markets have done, all stocks that are desireable should fair well in this environment. Have all stocks done well on this market run? Absolutely not. You need look no further than the hard hit chip and computer industry to see that as not true. You still have to invest wisely. You cannot throw a dart and hit a winner at this stage of the markets recovery. All those who read me over the years know my thinking on what stocks come up, when and in what order following a market correction. Good stocks move up first. Then the speculation laggers. Then the pure speculation plays might get some money, while bad performers are liquidated still to create cash for other purchases, as this is a portfolio shuffling time frame in the markets. The time to hold on to your bottomed stocks from 2009 is over. They have come back as much as they are going to on their own now, enjoying unfloundering market success. Time to be smart and move into the real winners now. Is Sirius XM a winner going forward? In my opinion yes, It is, even at these prices. Heres why.

Growth.

Sirius XM grew revenue at a 10% min rate during a recession. A 10% revenue jump is nothing to thumb your nose at. They enjoyed a 159% increase in FCF and a usual around 20% jump in EBITDA. They grew their subscriber base from 19 million to over 23 million during the worst recession in my lifetime. Now what happens if the economy improves? I fully expect Sirius XM's retention and subscriber totals to improve as well. This means even more money to their already widening margins (about 255 million now in net difference). Today they enjoy a gross margin of about 30%, and improving. In my estimates, for every 30 million in added revenue, they are adding about 5 to 10 million in costs. So every Q their margin gets wider and wider(pure value, not percentage necessarily). But I do expect their % of margin to increase as well as costs become controlled, and their new GM OEM contract deal kicks in. Also noted this Q was the lowest cost in programming since 2005. Nice touch. Adding better value and paying less. Advantages of a monopoly coming home to roost right there. More and more used cars every year on the road with a SATRD inside. OEM penetration rate is a self imposed 67%. Conversion rate has been steady at 44% and churn is stable at 1.9 to 2.0%. With rising ARPU and sub base, they can't help but continue to grow their margins going into 2013 and beyond. No satellite cost over 50 million going into 2013 and beyond for the next several years after that. Subscriber estimates for 2013 I am personally forecasting now as 2.1 million subscriber additions for 2013. This will fuel revenue growth, as will ARPU as it approachings around 12.50 by the end of Q1 2013.

Innovation of product and focus on customer retention.

This goes partly with growth obviously, but I see it as a seperate issue. What is the best way to grow a business? Keep your existing customers. They will talk about you. They become loyal. Best form of advertisment is your own product. Sirius XM since the merger has delivered on a better product available more places, on more devices and easier than ever to access in the digital and cell phone age. Internet service has been revamped, additional features offered, and coming soon even personalized radio. Mel Karmazin, CEO of Sirius XM Radio stated that they are entering into the personalized radio service not as a business model, but as a retention service designed to provide their customers with all cutting edge technological aspects of listening to radio. The rolling out of Sirius XM 2.0 service shows their customers their is always something new you can look forward too.

Cash.

Having cash is never overrated. You can improve your business, invest in R&D, market effectively and acquire talent. Sirius XM is now in a desireable position as a company making money and being able to offer the highest salaries in their industry. Going forward to not be surprised if they add the talents of the likes of Rush Limbaugh in the future, as well as other top radio talents. I predict in 2013 they will add Rush Limbaugh to the Sirius XM Family.

Leverage.

Investors know that the true value of a company can be seen in how much money they can borrow and how cheap they can acquire it. A good rate means the company is strong and expected to repay the loan. Forget investors. These are creditors. They hold a much higher standard and take a much deeper and more involved look into a companys books before loaning out money. We do it as an investor, but don't forget its done even more so on the credit side. S&P and Moodys over the years have been steadily raising their corporate rating. They are now considered underleveraged, as S&P stated recently that they can actual add debt and have it not affected their credit rating. That is good news, especially when a company is looking to return capital to shareholders.

Leverage leading to a buyback.

In 2013 Sirius XM will announce their first ever buyback, in which Liberty Media does not increase their % of ownership. This is a partial win for stockholders. Better than having Libertys % increase due to a buyback, but not as good as if Liberty went in owning no preferred shares (which is still possible if they go to full control still, which is in doubt at this point). Their new majority owner Liberty Media is a big proponent of adding value to the share price and returning capital to shareholders in the form of huge buybacks. Expect no less in this situation as well. Sirius XM is poised to delivery back capital to investors in the form a buyback. This has been stated numerous times as a likely outcome by the Mel Karamzin, as well as mentioned as possibilities by Greg Maffei, CEO of Liberty Media, 49% owner of Sirius XM.

2013 Guidance for Sirius XM...

Remainder of article can be found in the Relmor SIRI Gold Forum.

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