By: Jayson Derrick
Sirius XM Radio (SIRI) has always been on my radar as I have been sitting on the sidelines waiting for a clear buy signal. I believe that this buy signal was apparent when the company released their quarterly results.
Expectations for Sirius XM were high going in to 4Q'12, with the company pre-releasing subscriber results exceeding guidance, setting a high bar for the 4Q results. Granted, the company slightly missed top-line revenue and EBITDA, I believe the financials will be an afterthought. The miss was primarily driven on sales and marketing spending, which I can overlook as the company achieved the best churn rate in almost five years at 1.8%. With 24 million subscribers of which more than 80% are paid subscribers, there is a lot of room for the company to grow, and for investors to profit.
Interim CEO Jim Meyer solidified his chances of turning his interim status to permanent during the conference call. Meyer delivered all the key points investors were hoping to hear including his commitment to enhance shareholder value such as commencing the $2 billion share buy back immediately, and committing to a 3.5x target leverage ratio. Meyer laid out his vision on why IP and telematics could be future growth engines for the company, and at around $3.15 a share I am willing to trust him and the company with my investment.
The company is dependent on auto sales which are already off to a strong start in January which saw 15.3 million units sold which represents a roughly 14% year over year increase. My Ford SUV came equipped with a free 6 month trial, and I couldn't be happier with the product, price and convenience, and will certainly renew on a full year scale. The company reiterated its recent 2013 guidance, which I believe will be raised so long as positive trends in autos continue.
When I am looking at Sirius all I see is substantial growth in an addressable market, coupled with surging free cash flow and ample share repurchase. The company has an aggressive plan of increasing the installed base of cars on the road from 50 million today to 150 million over the next decade, and I trust that many of these new viewers will do like I plan and renew. I am impressed by the subscriber growth, falling opex/capex, 70% contribution margin and nearly $8 billion tax net operating loss all of which factors favorably for a company well positioned to take off like company like Sirius XM.
I am looking at a price target of at least $4 which is a healthy ~25% gain based on the fact that the stock is trading at a 2013 EV/EBITDA multiple of 17x, which is too low for a company that should nearly double EBITDA and free cash flow over three years and also with the opportunity to tap an under-levered balance sheet to repurchase a large chunk of shares.
To conclude I am ready to enter a position in Sirius XM within the next few days. An article by Little Apple pointed out the fact that company has a strong interest in buying back shares at the cheapest price possible. The article goes on to say "The buybacks will clean up the dilution. And if the price does drop, Sirius can buy even more shares. There is a built in safety net. A definite win-win.". I agree with Little Apple, it makes sense that the company wants to pay the least amount per share and long term investors shouldn't concern themselves with short term drops in price. My strategy is to enter a small position and buy more on the dips lowering my average cost.
While I recognize downside risk exists, I am not particularly concerned with them. Risks include increase competition (unlikely given the high penetration and lack of anyone else in the market), governance and share liquidity concerns prompted by Liberty Media's ownership aspiration (which doesn't seem to be an issue as Liberty considers the stock price too low), and lower than expected car sales which I do believe is not the case based on January's strong start. All in all, I like the company and management, I like the product, I like the future guidance, I like the ownership, and most importantly, I like the stock price.