Sirius XM: What's The Value Of The Largest Radio Giant On Earth?

Feb.28.13 | About: Sirius XM (SIRI)

Many investors wonder when they should buy, sell or hold. It is not an easy answer, and if it was, everyone would make millions. Yesterday, I received this comment on my latest article about Sirius XM (NASDAQ:SIRI), regarding how I would establish the share value:

halito27 Comments (257)

LA - I'm sure you've stated this elsewhere, but I'm not sure: do you have a target price for SIRI? Where do think it seems likely to head this two years...or further down the line? And how do you establish your valuation: EV/EBITDA, or using some other model?

Just curious - I have my own ideas, but I don't mind crowd-sourcing this to see what others come up with. :-)


What a really great question. Since my answer will be quite long, I decided to make it into another article, which will hopefully generate a lot of input, or as you said "crowd-sourcing" from other investors. First, as I wrote in my article last fall Sirius XM: EBITDA or EBIT-Duh, I would never use EBITDA or EV/EBITDA to value Sirius XM. The definition is: EBITDA = Revenue - Expenses (excluding interest, taxes, depreciation and amortization). And the EV stands for Enterprise Value.

For those of you that like using EV/EBITDA, otherwise known as the Enterprise multiple, or if you are not familiar with EBITDA, I suggest you read that article. There are a lot of reasons not to use it to value Sirius. And for that matter, there are a lot of reasons not to use EBITDA at all. Consider this famous statement about EBITDA made by Warren Buffett about ignoring the "D" in EBITDA. This is how he put it in his 2002 letter to shareholders:

Trumpeting EBITDA is a particularly pernicious practice. Doing so implies that depreciation is not truly an expense, given that it is a "non-cash" charge. That's nonsense. In truth, depreciation is a particularly unattractive expense because the cash outlay it represents is paid up front, before the asset acquired has delivered any benefits to the business....Does management think that the tooth fairy pays for capital expenditures?

Warren Buffet does not use it, because it doesn't take into consideration the fact that the "D" Depreciation is an actual expense. A very large expense which could drastically change the true value of two otherwise identical companies. However, my biggest reason for not using it to place a value on Sirius is because of the NOLS. Here is an excerpt from my article mentioned above:

What about the NOLS. They are worth a fortune, and yet where are they in the equation? Because of this the ratio may not work for companies that don't pay taxes. Consider this statement from someone that loves the EV/EBITDA ratio:

"Every Ratio Misses Something - Like Companies With 0% Tax Rates No price ratio is perfect. Bloomberg says Carnival (NYSE:CCL) has an EV/EBITDA ratio of 10. Now, you might think the "DA" part of a cruise company - since they spend so much on very long lived ships - is going to be the most important thing to worry about when thinking about the EV/EBITDA ratio. And that would be true, except… Cruise companies don't pay taxes. So when a cruise company and a railroad both have an EV/EBITDA of 10 - the railroad is going to pay 35% of its income to the government, the cruise company is going to pay 0%. That's a hell of an asterisk."

So when comparing the Sirius ratio to another media company that will pay taxes, the ratio is not any good. I know there are probably some accountants reading this, that could add to the conversation. But according to my research EBITDA is not approved by GAAP:

"EBITDA is not a GAAP approved accounting measure because EBITDA neutralizes the effects of a company's financing and accounting decisions."

Because of this, I can not see using that ratio to determine the future value of Sirius. However don't expect the company to stop reporting it. Too many investors are used to using it. Just know that when you hear Sirius has the same EBITDA as a competitor, they probably will have to pay taxes out of it, and Sirius can use its NOLS.

So what do I look at to determine value? Numerous things which include the past growth, macro events, positive and negative articles written about Sirius (whether factual or not), and remarks made by management which include current and future developments.

To begin with, I look at what the financial experts have to say on Yahoo, and I weigh that against what I already know. Since 2011 the actual share price compared to these analyst's estimates usually ends up in their upper target range. So by using their knowledge and expertise, compared with what I know, the 1 year target would be $3.85 to $4.00:

Price Target Summary

Mean Target: 3.48
Median Target: 3.50
High Target: 4.20
Low Target: 2.45
No. of Brokers: 15
Click to enlarge

Data provided by Thomson/First Call

Then, I consider the past growth, and the rate of growth, looking over various time frames compared to the other market indices. Over the past year, Sirius is up 40%:

Chart forSIRIUS XM Radio Inc.

And, over the last two years, it has gone up over 80%. To think that the shares would not go up that much again is not out of the question. Especially since the last two years have been extremely hard on consumers. But now new car sales are on the rise, which will send Sirius subs soaring as more radios are installed in those cars. And many investors feel that with the largest Sirius "insider", Liberty Media (NASDAQ:LMCA) now in the driver's seat, the company will advance at a faster pace than it did under the previous CEO, Mel Karmazin:

Chart forSIRIUS XM Radio Inc.

If the shares did jump another 40% in the next year (based on the current price of $3.08), the share price would be $4.31. And if it continued at that same pace, the price would be $6.03 in two years. Exceptional good news could make those numbers higher. Obviously negative macro events, or some other catastrophe could change the numbers downward. This is what the shorts have been counting on.

Since July 2012, Sirius short interest has fluctuated between 250 million and 406 million shares (current short interest). When determining a target price, this can not be ignored, because the shares can go up and down with the option activity each month. On the chart below, which only shows weekly prices in an effort to save space, there are distinct highs in the first part of the month leading up to a peak in the middle of the month when the options close. Then after the shorts have covered, there is a low period after the options close. There are a lot of things that happened during this time period to affect the price, but those peaks and dips are still there due to the large number of shares sold short:

Price Of Sirius XM
Click to enlarge
Date Open High Low Close Avg Vol Adj Close*
Feb 25, 2013 3.06 3.10 2.97 3.06 69,392,400 3.06
Feb 19, 2013 3.16 3.20 3.02 3.05 50,763,100 3.05
Feb 11, 2013 3.13 3.23 3.13 3.15 47,217,700 3.15
Feb 4, 2013 3.23 3.24 3.10 3.12 67,168,800 3.12
Jan 28, 2013 3.15 3.25 3.12 3.23 45,349,300 3.23
Jan 22, 2013 3.17 3.17 3.08 3.15 45,649,800 3.15
Jan 14, 2013 3.15 3.19 3.12 3.16 46,870,300 3.16
Jan 7, 2013 3.11 3.19 3.06 3.16 83,933,700 3.16
Dec 31, 2012 2.88 3.15 2.88 3.10 80,038,300 3.10
Dec 24, 2012 2.93 2.96 2.88 2.89 24,436,300 2.89
Dec 17, 2012 2.86 3.01 2.85 2.95 80,986,000 2.95
Dec 14, 2012 0.05 Dividend
Dec 10, 2012 2.78 2.93 2.68 2.91 66,648,400 2.91
Dec 3, 2012 2.79 2.85 2.73 2.76 88,461,600 2.71
Nov 26, 2012 2.76 2.80 2.67 2.77 70,113,500 2.72
Nov 19, 2012 2.71 2.82 2.69 2.78 59,787,300 2.73
Nov 12, 2012 2.77 2.84 2.55 2.69 82,238,900 2.64
Nov 5, 2012 2.90 2.90 2.66 2.75 69,293,800 2.70
Oct 31, 2012 2.84 2.96 2.74 2.90 85,045,500 2.85
Oct 22, 2012 2.94 2.95 2.79 2.82 75,907,400 2.77
Oct 15, 2012 2.78 2.97 2.76 2.92 104,194,800 2.87
Oct 8, 2012 2.67 2.79 2.63 2.78 95,109,900 2.73
Oct 1, 2012 2.59 2.75 2.56 2.69 67,363,800 2.64
Sep 24, 2012 2.53 2.60 2.44 2.59 63,530,700 2.54
Sep 17, 2012 2.44 2.59 2.33 2.54 81,172,600 2.49
Sep 10, 2012 2.51 2.53 2.39 2.47 63,045,400 2.43
Sep 4, 2012 2.53 2.56 2.49 2.53 39,204,000 2.48
Aug 27, 2012 2.55 2.56 2.49 2.53 51,697,700 2.48
Aug 20, 2012 2.60 2.64 2.47 2.54 44,230,600 2.49
Aug 13, 2012 2.49 2.60 2.47 2.56 72,447,000 2.51
Aug 6, 2012 2.17 2.51 2.17 2.48 168,687,700 2.44
Jul 30, 2012 2.18 2.20 2.09 2.16 30,977,000 2.12
Jul 23, 2012 2.07 2.17 2.03 2.16 40,531,100 2.12
Jul 16, 2012 2.04 2.16 2.02 2.10 41,829,900 2.06
Jul 9, 2012 2.11 2.12 1.99 2.05 39,842,900 2.01
Jul 2, 2012 1.84 2.13 1.84 2.05 50,902,700 2.01
Jun 29, 2012 1.88 1.89 1.82 1.85 37,077,600 1.82
* Close price adjusted for dividends and splits.
Click to enlarge
Click to enlarge

If you are a trader, be aware that the exact time of day, and date of the extreme high and/or low is very difficult to predict. And if you pick one of those prices when determining a target price, your answer can be skewed. For instance if we consider the 7 month gain based on the low of $1.82 and the high of $3.25, the gain would be almost 80%. Great for traders, but not for determining a target price.

There is another catalyst that we must consider. The $2 billion share buyback. The company wants to buy shares at the lowest possible price. And for long-term investors, that is a good thing. But as I wrote on another comment, a buyback is like a face lift. It is very painful while it is happening, but the end result is (usually) beautiful. When Sirius CEO Jim Meyer spoke on Tuesday, he said he would keep us updated each quarter on the progress of the buyback. The reason that this might change the target price (upward), would be if it was completed very quickly. This would put buying pressure on the stock as more and more shares are removed from the float.

Considering fundamentals, Sirius is poised to shoot higher. In the last 30 days, analysts have revised the EPS upward from 2 cents to 3 cents for Q1 and Q2 of this year. This may be due to the increase in auto sales. And the forward P/E is at a healthy 23.69. The company is paying off debt, and increasing revenue and cash flow. And the technical indicators look solid:

Chart forSIRIUS XM Radio Inc.

So although there might be some dips during the buyback, that some investors think are manipulated, the overall picture continues to look strong. Some of the investors that think the stock is being manipulated, also think that Liberty is trying to keep Sirius' price down so that it can be purchased cheaply and taken private. That is not impossible, but it is highly improbable, considering that Liberty has shareholders that would also be hurt with such a move. And it would not be cheap. If growth continues at 40%, and the share price goes to $6 in two years, the market cap would be $40 billion based on 6.67 billion shares.

So halito 27, that is my answer to your comment. That is the tip of the iceberg, but it provides a starting point for you and others interested in investing in Sirius. I can not wait to hear what you and the other readers think the price will be: and how you determine it. Thanks again for such a great question, and Cheers to you too!

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.