By Brandon Matthews
Sirius XM Radio (Nasdaq: SIRI) reported its 2009 operating results on Thursday, which by any measure were no less than outstanding (call transcript here). Sirius reported positive earnings as a follow up to its pre-announced subscriber numbers, several weeks ago. Most had expected to see an increase in subscriber acquisition costs (SAC) and a decrease in average revenue per user (ARPU). That was not to be the case as Sirius XM reported that ARPU grew to $10.92 from $10.65, and a year over year reduction in SAC of 9% from $70 to $64. Sirius XM then went on to provide optimistic 2010 guidance. The results have been met with mixed responses, with concerns over valuation continuing to be the mantra of Wall Street.
Some people are just too smart for their own good, and for whatever reason simply do not possess either the ability to think outside the box or apply information that is publicly available, beyond that of a mathematical equation. When comparing Sirius XM to other subscription based media, it is all too easy to assume that Sirius XM is overpriced on a fully diluted basis. This suggests that “the market” is wrong, which as history teaches is never the case. I have learned that when I come to a conclusion that is in disagreement with the market, I am missing the bigger picture.
As an example, most of the experts that follow Sirius XM Radio are valuing Sirius XM on a fully diluted basis which includes the 40% stake held by Liberty Capital (NASDAQ: LCAPA). This is their first mistake, as explained by Liberty Capital CEO Greg Maffei during Liberty’s earnings call (transcript here):
“I do not believe it is likely that we will trigger the gain in Sirius. There is virtually no scenario I can think of that my chairman would let me even talk about doing that. So you’re talking about something we’re either likely to, somewhere down the road, find another way to get liquidity in Sirius or become a purchaser of Sirius. And I think we’ve talked about that in the past. So it’s a logical alternative.”
This tells us that the Liberty stake in Sirius XM will likely never dilute Sirius XM’s existing shareholders. In contrast, it suggests only two potential outcomes. One is that Sirius XM Radio will repurchase Liberty’s stake sometime in the future, or as I suggested recently, that Liberty Capital will purchase Sirius XM outright. The only consideration to value Sirius XM on a fully diluted basis would be that a third party could make a bid for Sirius XM, which in my opinion is highly unlikely given the meetings that were held last year that brought Liberty to the table.
Looking then from a mathematical standpoint with this new knowledge, Sirius XM has a market cap of $3.94 billion. Add in debt, back out cash and you get an enterprise value of only $6.64 billion. Divide that by Sirius XM’s guidance of $550 million and we arrive at an EV/EBITDA multiple of 12. Still some will suggest that 12 is too high when compared to 8x EV/EBITDA multiple of Sirius XM’s peers. As I previously explained however, the market is never wrong.
Satellite radio is a unique subscription service which has an estimated potential market of over 300 million subscribers. This potential market far exceeds that of any other subscription based service. Although competition exists in the form of terrestrial radio, MP3s, CDs and streaming internet services, these forms of competition are akin to newspapers and the internet competing for user time with cable or satellite television. It’s like comparing apples to oranges. The entire satellite radio market in the U.S belongs solely to Sirius XM. Simply stated, if DISH and DirecTV (DTV) as an example had the same potential consumer market, the potential market of each would only be 150 million subscribers.
It is for this reason that Sirius XM Radio commands a higher multiple than its perceived peers. Further, an argument could be made that with the Liberty dilution potential now off the table, Sirius XM is undervalued. Of course that would mean that the market has it wrong…
Position: Long SIRI
