Sirius XM Radio (NASDAQ:SIRI) recently released partial guidance for 2013. The numbers included:
- Revenue of over $3.7 billion,
- Adjusted EBITDA of over $1.1 billion,
- Free cash flow approaching $900 million,
- Self-pay net subscriber additions of approximately 1.6 million, and
- Total net subscriber additions of approximately 1.4 million.
The announcement also stated Sirius XM "...expects to meet or exceed all of its 2012 financial guidance."
Those financial guidance figures are:
- Revenue approaching $3.4 billion,
- Adjusted EBITDA of approximately $900 million, and
- Free cash flow of approximately $700 million.
What should investors take away from all these numbers? First, they should probably note that the rate of growth is projected to decline from 2012 figures. Second, I would suggest that they focus on how that growth affects the Free Cash Flow ("FCF") figure. I recently wrote an article that noted:
The revenue guidance of $3.7 billion is 9% above the $3.4 billion results guidance for 2012. This is a dramatic slowdown from the $0.4 billion or 13% growth of 2012 over 2011, and comes despite a growth in the number of self-pay net adds of 8% and a 12% price increase that was gradually rolled out to the subscriber base in 2012.
The slowdown in the top line permeates its way through the income statement and the company's FCF. In 2012, FCF grew from $416 million to more than $700 million, or more than 68%. In 2013, the FCF has been guided to grow by less than $200 million, or less than 29%. It's still very strong growth, but if one also considers that the company replaced nearly $1 billion of high interest debt with $400 million of 5.25% debt for a net interest expense reduction of approximately $100 million, the growth becomes much less impressive.
Why the focus on a slowing rate of growth? Because Sirius XM, despite a low share price of less than $3.20, is not inexpensive. During the recent Citi Global Internet, Media and Telecommunications Conference, Sirius XM CFO David Frear discussed the rate of growth of the FCF on a per share basis. He noted that the anticipated share buyback of $2 billion would reduce the sharecount by about 600 million shares or 10%, and that "marrying" that with FCF growth of more than 20% would result in an increase of FCF/share of about 40%. It all sounds very impressive. How much is an investor really paying for that growth?
Currently, there are 6.8-6.9 billion diluted shares of Sirius XM. Based on last year's FCF of $700 million, that comes to just over ten cents per share. How does 2013 measure up? Frear used a share reduction figure of 600 million. $2 billion divided by 600 million shares comes to $3.33 per share. It's a bargain according to many others that are predicting a sharp increase in prices, but let's go with that for the purposes of this exercise. Using the 2013 FCF of $900 million and a diluted sharecount of 6.2-6.3 billion, the FCF per share would be about 14.5 cents per share, in the "40%" growth range that Frear discussed.
It also means that the shares are currently trading at more than 20 times the projected FCF. And, if as some are projecting, the price rises to $4/share, it would be trading at more than 25 times FCF. And, remember, that's IF the company can buy back 600 million shares at $3.33.
Former Sirius XM CEO Mel Karmazin had a history of issuing initial guidance that was somewhat conservative. Then throughout the year, that guidance would be raised and beaten. It remains to be seen whether Interim CEO Jim Meyer is following the same path.
Regardless, the market is characterized as a forward-looking discounting mechanism. The high FCF/share multiple suggests that significant growth is expected to continue. Perhaps it can, but it will become increasingly difficult. There isn't sufficient FCF growth to generate additional meaningful buybacks, especially if the next round of buybacks will cost more than the current projected average of $3.33 per share. That would indicate the company will need to take on more debt. More debt will also increase the interest expenses, reducing FCF.
Aside from continued expansion of the recent used car initiative and growth in light vehicle sales equipped with OEM installed satellite radios, there are other factors that will affect FCF growth. It is known that the cost of broadcasting music will increase based on the recent CRB decision. The new 5 year term will see an increase by 1% of revenue this year and 0.5% each of the next five years. It is expected that this cost will be offset by increases in the Music Royalty Fee charged to subscribers. It is also anticipated that a renegotiated agreement with a major OEM will lead to cost savings and be net FCF positive. These changes are not expected to significantly impact subscriber growth or new vehicle penetration rates.
Sirius XM shares are currently trading at more than 30x trailing FCF. On a forward basis, they are trading at more than 20x projected FCF. And, if the shares rise to the $4 price expected by some analysts, it will be very difficult to buy back the 600 million shares and that multiple will rise even higher. If one is expecting the share prices to continue to rise, future buybacks would have less impact on improving FCF/share.
Based on most of these multiples, I find the shares priced above $3 -while low in price - to be an expensive price to pay for less than 15 cents in earnings. And, while I find the stock to be fairly expensive, I have also found that it has not always stopped the share price from moving higher.
Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have $3 January 2013 covered calls against most of my SIRI position. I also have a variety of other covered call positions. I may initiate (or close) a buy stock/sell option position in SIRI discussed in a recent article at any time. Also, in addition to long-term holdings, I have recently begun day trading 10,000 share blocks of SIRI and may continue to do so. I am also long C.