King of All Trades Target Price Valuation (May 2013 to Dec 2013 (8) months) for SiriusXM Satellite Radio (NASDAQ:SIRI)
Prepared by Andrew Montero on May 6th 2013
KOAT is assuming a $4.25 6-8 month price target on Sirius XM satellite radio. The $ 4.25 target takes into account fully implemented across the board price increase ($14.49 subscription price). Management has provided improved outlook /guidance on churn as well as a solid reduction in SAC for recent quarter.
Our $ 4.25 price target is maintained based on fully implemented increase of subscription price to $14.49 without any effect on our “above consensus” rate of sub growth projections for the Company. We agree with minimal impact to churn at this point going forward.
Assuming our Base Case scenario (no change in monthly subscription price of $14.49),
we value Sirius XM currently at approximately $ 4.00 per share with continuing increases in automobile sector year over year and a final auto production rate for 2013 over 15.0 million units.
With future share repurchase and improved credit profile we value Sirius XM at approximately $ 4.25 per share in 6-8 months based on increased OEM subscriber growth, continued traction in online listeners, share repurchase implementation, increasing FCF and EBITDA guidance.
Base Case – Evaluated on fully executed company price increase in 2013; an 11.5% price increase (to $14.49 per month) and a maximum ARPU of $13.00 (achieved in 2013) with associated increases in FCF, EBITDA subscriber base targets and revenue as recently reaffirmed by company CEO James Meyer.
Scenario 2- Based on share repurchases, increased ownership by Liberty Media and, improving EBITDA, FCF, revenue and subscriber numbers, even with limited uptick in churn still possible( 2% - 2.2%) and NOLS now utilized, we see no impact of increase in subscription price affecting the equity, and project a share price of $ 4.25- $4.50 in the 8 to 12 month window. OEM production rate would need to continue increase to over 15-15.5 million units for 2013-2014 timeframe.
Scenario3- Based on the above as well as expansion to markets outside the United States and Canada in the short term as a possibility, we see a potential for an equity value in the 6 to 8 dollar range should penetration occur relatively soon in new markets (internet, wireless radio) and saturation in OEM auto channels overseas occurs. Some mild initial erosion of equity price may occur prior to realization of viability in overseas markets.
Under our Base scenario (which equates to current company projections), we think the Company is worth approximately $25 billion today, which equates to roughly $ 4.00
per share outstanding. We see continuation of recent growth pattern and exponentially
improving financial metrics as satellite 2.0 continues to gain traction and spectrum continues to be leveraged for possible expansion of services provided the economy (particularly the auto sector) continues to grow and improve. We believe Sirius XM has and will continue to successfully grow through subscription price increase in the near-term without disrupting the current level of subscriber additions, and that increased royalties will not hinder the company’s recent strong performance. We maintain an overweight recommendation on the equity.
We believe Sirius XM has some level of price flexibility before best case unit growth
would begin to be seriously impacted. Given that, we see the situation creates a share value
estimate that is higher than current market views. In our opinion, whatever favorable option
value there may be to justify a more aggressive investment view is appropriately weighted. Forward impacts include, increasing subscribers, expansion outside US markets and reduced operational costs as well as significantly improved debt leverage ratios as appropriate based on cash flow.. We believe that the risk/reward is now very favorably weighted towards Sirius XM common stock.