By Relmor Demitrius -
Sirius XM Radio (NASDAQ:SIRI) CEO Mel Karmazin on September 14 announced during the BOA Media Conference their guidance for 2012. His presentation was almost entirely new information, which was a bit of a surprise to the media present and investors who were listening. In years past these conferences held tidbits and hints of information but this time Mel was candid and forthcoming with news on Sirius 2.0, the upcoming price increase, plans for the future, and in fact guidance for 2012 earlier than promised. Mel had stated that guidance for 2012 would come during the third quarter conference call in November. Why did Mel release this information earlier than planned? I’m sure at the time Mel knew he was presenting at the Bank of America conference. It could be possible Mel was so excited about the news of 2012 and what it meant for the company (2012 was a targeted crucial year in Sirius XM’s recovery) going forward. Apparently from the lack of upgrades, price target increases, and general malaise about the presentation, I apparently am needed to explain just what exactly Sirius XM is guiding. It is more than just some numbers on a piece of paper. But first let us address some of the other aspects of the conference and what we learned from his discussion other than guidance.
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I could talk about Mel’s hints and his tone. I could discuss how Mel appears to show disdain toward the “Doctor”, John Malone, as he called him, to a huge laugh. When an ignorant questioner tried to foment an opinion that wasn’t true about Malone and the stock price, Mel was quick to embarrass her and show that he isn’t amused anymore by media fomenting, especially on that touchy subject of Malone stealing 40% of the company. He was clear in his intent that Liberty was a necessary evil and that he would prefer they not be involved in the company going forward. Although he appreciates their board experience and input, he admitted there is no advantage to date of Liberty Media (NASDAQ:LINTA) investing in the company. No cash transfer, no balance sheet help, no deals with sister companies, just a guy taking advantage of a cash cow while times were hard. Mel’s plans to make Malone pay a premium to add to their Sirius XM ownership levels appears still his game plan and I felt by his comments that Malone’s end goal isn’t even clear to him. Here he answers a question about his comments on how he would make it as expensive as possible for Malone to add control. He has mentioned this concept in the past a few times.
Question: .....I know you expressed the idea before that if liberty took over they would have to pay some control premium. Is buying you’re stock back in conflict with that idea.
Answer: No. I think the idea is that one of the sensitivities that we would have to deal with..... and we haven’t gotten this far with our board.. Our board .. you know the decision to do a buyback or a dividend or not do anything would be made at the board level. But we have no plans to ever thinking about shrinking our load so that Liberty would be able to get have more control than they do today and 40% is where Liberty is today. The idea wouldn't be that we would buy back shares, and then therefore liberty would get an accretive therefore have a higher percentage of the company. This is something we would "balance" if the decision were made to do that.
This potentially solves the debate on a buyback increasing Liberty’s stake. The answer to the question was no and Mel has no plans to shrink their load and they plan on doing a buyback. It’s called logic. You do the math. Hard to argue with facts. If they want to do a buyback, plan on doing a buyback, but have no plans to increase Liberty’s percentage of ownership…. Sounds like they have it covered to me. Non-issue now at this point. I feel confident that Mel will do what is in Sirius XM stockholders best interest with this issue. I appreciate him answering this topic directly. Do I still fully 100% understand exactly how a buyback would work in regards to Liberty? No, but Mel seems to be consistent that a buyback is beneficial to stockholders and if Liberty’s percentage increased with a buyback, there would be no benefit other than a lower P/E ratio and a lower share count. A buybacks intention is to increase shareholder value. Remember, the question always asked to Mel is how does Sirius XM plan to return value to stockholders. A buyback that increased Liberty’s percentage of ownership has NO VALUE to a Sirius XM Stockholder, hence it must not be the case. Now let’s take a look at the guidance for 2012 and what it means.
Sirius XM guided revenue at 3.3 billion, an increase of $300 million or about 10% over 2011. 10% revenue growth is a nice increase for any company during a recession, especially if you are a 100% discretionary income company. No one needs satellite radio to live. Yet subscribers are still growing by the millions a year. Some analysts were suggesting 3.37 was the expected amount. Yet these are the same analysts who fail to even get close yearly earnings totals. Interesting isn’t it. They are low on earnings, but high on revenue. Sounds to me they are either lying or incompetent, with no clue on how the model works or how to estimate margins or costs. You decide. Either way is pretty bad. Sounds to me like you can ignore their “revenue miss” as full of @#$%. If you can’t even estimate free cash flow at all, earnings for 2012 correctly, or EBITDA at all, then don’t bother with revenue. That’s like saying the New York Knicks will score 110 points tonight, but you don’t know what the other team will score. Not very useful in betting on the outcome is it? Easy to guess high on revenue to make a company miss it. What is hard is to show your estimates on FCF, earnings and EBITDA accurately if you have no clue how too in regards to this company.
Is 3.3 billion high enough revenue? Most definitely because costs for 2012 are dropping from 2011 as well. Satellite capital expenditures alone will drop around 120 million this year from 2011, 210 million from 2010, and 190 million from 2009. That is almost 2 cents diluted earnings higher than 2011 right there from one line item on the cost side alone. Add another 300 million in revenue and that is another 3 cents a share right there higher than 2011. So just on these 2 things alone, right now Sirius XM investors can expect 5 cents diluted earnings HIGHER than what 2011 will bring. Right now Sirius XM has 5 cents of earnings for 2011 already. Remember, before the year started, estimates were around 3 to 5 cents total consensus. We have already matched yearly estimates from a year ago on earnings. See what I mean? Low on earnings but high always on revenue…. Very confusing. So like I said before, either analysts are incompetent or lying. I hope they are incompetent for their sakes. Right now analysts are expecting 3.37 billion in revenue, but only 5 cents of earnings. What!!! Someone is crazy or incompetent or lying to me. How can revenue increase 300 million, costs drop at least 120 million, and get only a 140 million dollar increase out of it? Not to mention the original model already is set to provide 5 cents in earnings to date in half a year in 2011? Baffling? Not really if you have been covering this stock for a while. Actually very typical of this stocks coverage.
My 2012 earnings estimate based on facts and information Mel has provided is for 12 cents a share in 2012. My revenue estimates are actually around 3.4 billion, slightly higher than analysts are expecting, just my earnings are a 7 cents or 490 million dollar difference. How can they be so wrong? Call them and ask them individually. I would. Now on to free cash flow and EBITDA.
Mel stated that free cash flow for 2012 would come in around $700 million. This is a 75% growth year to year on this metric. This is a decent gauge of actually how much cash on hand Sirius XM could grow in 2012. In actuality, in a lot of times, cash will exceed this figure. This is a metric that accounts for other balance sheet asset/liability situations, and is not an exact measure of incoming cash. It could be more like 800 million in cash added in actuality. This is extremely encouraging news because at this point Sirius XM is in their self-stated “cash hoarding mode” to pay off the 2013 bonds coming due. This 770 million dollar 13% bond (the companies highest interest payment on the books) was especially damaging at the time in 2008 due to its perceived high interest rate. This was indicative of the bond market at the time and since then Sirius XM has been able to renegotiate other bonds for around 7.5%. This is a huge difference in only 1 years’ time. It reflects the company’s growing fiscal position and their perception of value to those who matter most, the people who determine what your corporate bond rate will be, not some hack author or analyst who doesn’t even know the service or metrics.
What does this mean? Well obviously this means that with 1 billion in cash on hand at the end of 2012(low ball), as stated by Mel as well, and 700 million in free cash flow, you can now consider the 2013 bonds paid in full. They have basically guided out their 2013 payment as done. Next. 2014 bonds are a convert at the $1.87 strike. They will be removed with already factored in dilution of shares and 100% already factored into the stock price as a guaranteed conversion (with lent shares out as well in this deal, was one of the reasons the stock tanked to under $1 in the first place.) So now Mel as basically guided away the “toxic debt” that the company took on in 2008 which caused the stock to tank in the first place. Remember, this was way before Malone came in in February 2009. This was an immediate tanking upon the news. We’re talking minutes upon its release. Exciting stuff for sure. If the market is forward thinking and trusts Mel’s guidance (missed low for 2 years now so no reason to think you can’t) the stock should recover back to pre-merger levels now, in logic. But you say not true, 40% of the value is gone. I disagree. Way more than that 40% has been added back in synergies, improved revenue, and subscriber growth since 2008. So I would disagree with that.
Mel guidanced EBITDA for 2012 at 860 million, a 20% increase from 2011. If you recall, Mel promised 20% EBITDA growth and has now delivered for 2 years in a row. This is why I can safely and logically use a multiple of 20 when obtaining an EBITDA evaluation of their stock price. A typical media company’s stock is valued as a multiple of EBITDA. So take 860 million and multiply that by 20. Now you would divide by their fully diluted share count (about 6.8 billion). This gives you an EBITDA/EV value of $2.35 a share. That is a 23% increase from current levels. This accounts for none of the stated price increase, which I will discuss later, or any growth to other line items or reductions in costs. Mel did not account for the price increase in his guidance. I had these estimates myself, actually higher, as Mel is being conservative, before the price increase.
Based on guidance we can now calculate as well their forward 1 year p/e ratio of 15. That means Sirius XM right now is not only a growth stock (20 multiple), it is a value stock with a low forward p/e ratio as well. Not surprising that institutions have been steadily adding shares since its low percentage of 18% in 2009. The percentage as of Q2 2011 is now 41%. That is a 23% increase in only 2 years’ time. Sounds to me like institutional money managers don’t read or factor in too many analysts opinions or journalists who claim the stock is a slow growth company. If this company is slow growth, I’ll take slow growth any day. My numbers are actually more realistic as our members have discovered than guidance. I think 1 billion in EBITDA is reachable in 2012, giving my EV value much higher at actually $2.94. This once again accounts from zero speculation and zero value to the price increase. ARPU will rise all year now, maturing sometime in 2013 for full value to the revenue side. Not only does locking in rates before the price increase drop churn and raise ARPU immediately before 2012, it will have an ongoing trickle effect all year as new subscribers begin paying the higher rates. Mel stated in January of 2012 the basic rate will increase from $12.95 to $14.49. I was expecting between a $1 and $2 increase to the basic package and it was dead on in the middle of that. I am actually glad they sided a bit with caution here given the economic landscape. Easier to go up again than back down. Good move. They will also have a tiered pricing service that will include best of and internet that will give consumers even more value at the high end than they are currently receiving. So some customers might actually have a small drop in price.
I expect ARPU to rise to $12 minimum by the end of 2012. By the end of 2013 it could hit $13. This is a huge financial difference to overall revenue. Just a $1.50 increase in the basic rate would generate approximately 375 million in additional revenue per year, or almost another 6 cents in earnings. The price increase is one of the major synergies touted in 2008 and one that is just now going to begin paying dividends to stockholders.
As you can see by the guidance Mel has given that there is reason to be excited about what the company can now accomplish in the future. Investors can now be armed with facts when a bear suggests that the company has debt issues. Not true. At one time they did, but at one time terrestrial radio was making a profit too. Some things just change. Best not to be stuck in old thought patterns when facts are hitting you on the head like a hammer. There is an old saying in life that applies to investing as well..” You either change or die”. Same is true with companies. Sirius XM has been changing their model since 2008 when the merger was allowed. They have added countless value to their service, expanded their internet service and content, and is now obtainable on most smart phones. With the addition of 2.0 coming in December of 2011, Sirius XM customers have an even better product to look forward too.
Disclosure: Long SIRI
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