Sirius XM Holdings (SIRI) was trading at $0.15 on December 1, 2008 and shares are now quoting at $3.77: A staggering increase of 2,413% over the most recent five-year period. With shares now quoting in vicinity of its five-year high at $4.18, investors might ask if Sirius can continue its steady uphill run. It is noteworthy, though, that Sirius XM Radio, with the exception of the July 2011 dip, never substantially corrected and bounced back almost immediately, which indicates strong buyer interest.
Sirius XM Radio is a radio broadcasting company offering commercial- free music, news-, talk- and entertainment shows as well as live coverage for major sport events such as NFL, NHL or Nascar Racing. The company has about 25.1 million digital music services subscribers which compares to roughly 6 million for Spotify, 2.5 million for Pandora and about 1 million for Rhapsody. In other words, Sirius is about 4 times larger (in terms of paying subscribers for digital music services) than the second-largest competitor Spotify or 2.6 times larger than the next three competitors combined. Of course, the beauty of the subscriber model lies in achieving scalability. New customers can be added to an existing subscriber platform at negligible marginal cost and the expansion of the subscriber base is hugely free cash flow accretive.
The following graph from Sirius' Liberty Investor day presentation highlights that the company is also one of the companies in the sector with the highest free cash flow performance (measured as % of EBITDA):
Historical Financial performance
Sirius' subscriber base has substantially increased over the years. Year-end 2009 subscriber volume stood at 18.8 million and it is estimated to increase to 25.4 million at the end of 2013 (a plus of 35% or a CAGR of 7.8%). Correspondingly, revenues have also been growing strongly: Revenues increased from $2.5 billion in 2009 to an estimated $3.7 billion in 2013: An increase of 48% or a CAGR of 10%. Adjusted EBITDA has grown at above-average rates as well: In 2009 Sirius earned $463 million in adj. EBITDA and gives a guidance of $1,140 million for FY 2013 (a plus of 146% or a CAGR of 25%). Free cash flow over the measurement period 2009-2013 literally exploded: FCF stood at $185 million in 2009 vs. ~$915 million in 2013 (estimated) and FCF has been grown 49% annually since the end of 2009.
Sirius also has strong relationships with car manufacturers to produce SiriusXM-enabled vehicles. Industry and company estimates project significant growth for such vehicles and hint at great EBITDA- and free cash flow potential in the coming years.
The company has meaningfully stepped up its share repurchase program leading to a reduced share count and higher free cash flow per share going forward. Sirius recently announced an additional share buyback authorization in the amount of $2 billion in and the company committed to repurchasing $500 million of common stock from Liberty Media (LMCA).
Sirius XM Radio has a couple of things going for itself that could justify a materially higher valuation. First off, it offers subscribers a great variety of commercial-free audio content and has differentiated its offering into Sports-,Comedy- and Entertainment. Second, the company expects strong growth due to an increase in SiriusXM-enabled vehicles from OEMs which could provide a boost to free cash flow growth. Third, a continued focus on share repurchases will lower the share count and drive FCF per share growth. Fourth, Sirius has a track record of growing the subscriber base, revenues, EBITDA and free cash flow over the last four years. This creates confidence that management knows its business and can perform for shareholders in the coming years as well. Fifth, I believe the subscriber model to be superior to a commercial-based model as the company can profit significantly from scaling subscribers. Sirius XM Holdings would be an appropriate investment for investors who want to get exposure to a fast-growing subscriber-based radio company that has an outstanding share price performance record over the last five years. I could see Sirius earn $0.24-0.28 per share in free cash flow in 2015 which represents about 100% upside from current free cash flow valuation levels.