By Relmor Demitrius
It has been a while since I used this communication form to discuss Sirius XM Radio with our readers. 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? It doesn't matter, because we are here and the past is irrelevant. Let other people with more time on their hands analyze it. What matters most is where we go from here. What can take Sirius XM Radio's (NASDAQ: SIRI) stock price to the $3.70 to $5 range? What is the 2013 guidance going to look like? When will the company begin the buyback and how aggressive will it be? Who will be Sirius XM Radio's next CEO? What is its 2013 fair market value? What will the stock price be in the 2013/2014 area? Let's examine a few things and see if we can deduce the answers to some or all of these questions.
Some analysts say we are on this bullish run as a result of Liberty (NASDAQ:LMCA) being forced to purchase shares on the open market. Some might tell you to look at what the main markets have done, then tell you all stocks that are desirable should fare well in this current 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 is not true. You still have to invest wisely. You cannot throw a dart blindly and hit a winner at this stage of the overall market recovery.
Anyone who has read my posts over the years will know my thinking on what stocks rise with the markets, as well as when and in what order they will rise following a market correction. Good stocks move up first. Then the speculation lags. Then the pure speculation plays might get some money during which time bad performers are liquidated to create cash for other purchases. Right now is a period of portfolio shuffling across 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 unrestricted market success through this stage of the recovery.
The time has come to be smart and move into the real winners now. Is Sirius XM a winner going forward despite current market conditions? In my opinion yes it is, even at these prices. Here is why:
Sirius XM grew revenue at a 10% minimum rate during a recession. A 10% revenue jump is nothing to thumb your nose at. They enjoyed a 159% increase in FCF and a around a 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 going forward. 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 that is improving. According to my estimates, for every $30 million in added revenue, they are adding about $5 to $10 million in costs. So every quarter their margin gets wider (pure value, not percentage necessarily). I expect their percentage of margin to increase as well as their associated costs to become more controlled.
Benefits of their new GM OEM contract deal will kick in. Also noted this quarter was the lowest programming cost since 2005. This added a nice touch, adding increased value at lower cost. The advantages of a virtual monopoly became apparent. There continues to be more used cars each year on the road with a an older, but serviceable satellite radio inside. The OEM penetration rate is a self-imposed 67%. The conversion rate has been steady at 44% and churn is stable at 1.9% to 2.0%.
With rising ARPU and subscription base, Sirius XM will very likely grow their margins going beyond 2013. There will be no satellite costs over 50 million for the next several years. I am personally forecasting the subscriber estimates for 2013 now as approximately 2.1 million in additional subscribers. This will continue to fuel revenue growth as will ARPU, which I expect to approach around 12.50 by the end of Q1 2013.
Product innovation and focus on customer retention.
This factor is coupled with growth, but I also see aspects of it as a separate issue. What is the best way to grow a business? Keep your existing customers. They will talk about you and provide the best advertising a business could want: word of mouth. They become and stay loyal. Since the merger, Sirius XM has focused on delivering a better product to more places, devices, and transitioned boldly into the digital and cell phone age. Internet service has been revamped, additional features offered, and coming soon even personalized radio.
Current Sirius XM Radio CEO Mel Karmazin stated that they are entering into the personalized radio service as a retention mechanism designed to provide their customers with all the cutting edge technological aspects of listening to any modern radio or music source. The company's existing subscribers now know, after rolling out Sirius XM 2.0 service, that the company will ensure they have something to look forward to.
Having cash cannot be overrated. It allows you to improve your business, invest in R&D, market your product effectively, and acquire better talent. Sirius XM is now in a desirable position as a company to tempt potential talent with the highest salaries in their industry. Do not be surprised if they add Rush Limbaugh in the future, as well as other equally viable top radio personalities. I predict he will be folded into the Sirius XM family in 2013.
Many investors know that the true value of a company can be observed in how much money that same company can borrow and how cheaply they can acquire it. A good rating means the company is strong and it is expected to have few difficulties repaying the loan. Forget the standard expected by investors. These are creditors we're talking about. They hold a much higher standard and take a much deeper and involved look into a company's books before loaning out money from their vaults. Over the years S&P and Moody's have been steadily raising their corporate rating for Sirius XM. They are now considered underleveraged, and as S&P stated recently they can add debt with far less impact to their credit rating. That is good news for a company looking to return capital to shareholders.
Leverage leading to a buyback.
In 2013 I predict Sirius XM will announce their first ever share buyback. I also believe Liberty Media will not increase their % of ownership in the process. This will be a partial win for stockholders. That is far better than having Liberty's percentage increase due to a buyback, but not as great as if Liberty went into the deal with no preferred shares (which is still possible if they opt for full control, although I think it is in doubt at this point). New majority owner Liberty Media is a proponent of adding value to the share price and subsequently returning capital to their shareholders in the form of huge buybacks.
I expect that we will see the same in this situation. Sirius XM is poised to return capital to investors in the form a buyback, something unforeseen not so long ago. This has been stated several times as a likely outcome by Mel Karmazin, and also noted by Greg Maffei, CEO of Liberty Media, 49% owner of Sirius XM.
So concludes my initial look at 2013 for Sirius XM Radio.