By Demian Russian
Maxim Group senior media analyst John Tinker initiates coverage of Sirius XM Radio (NASDAQ: SIRI) with a BUY rating and a $1.40 price target. Calling SIRI “under-owned” and pointing to its much lower than average institutional interest when compared to “the usual 70% to 90%,” Mr. Tinker said, “Its dollar price may be masking an oligopolistic quality of fundamentals that should attract a broader following.” He sees FCF (free cash flow) ramping up to $0.10 in 2012, and even sees “some kind of share buyback as possible” along with the company attaining a 2x net debt to EBITDA multiple in the latter part of that year. Comparing Sirius XM’s audio content inventory to Amazon.com’s (NASDAQ:AMZN) book inventory and comparing Sirius XM to Netflix (NASDAQ:NFLX) when factoring valuation, Tinker lays out a compelling case to support his BUY rating.
We believe that Sirius XM is the “Amazon.com” of the radio space. Amazon displaces local bookstores with limited shelf space by carrying 100% inventory; SIRI improves upon local radio, which has lost its programming originality due to conglomerates like Clear Channel. SIRI has 130 channels, featuring high-profile personalities, sports, and themed music channels.
– John Tinker, Maxim Group Senior Media Analyst
Tinker finds SIRI’s valuation particularly attractive and noted that Sirius XM’s quality franchise and growth prospects, along with its financial and operating leverage, “suggests that a higher premium is justified.” When discussing valuation, Tinker uses Netflix as its peer, but noted that Netflix is completely dependent on external suppliers, unlike Sirius XM’s hybrid of external and internally produced content. ”We believe that SIRI has a stronger model as it does not rely exclusively on outside products,” he explained. He compares his 14.5x 2011 EV to EBITDA multiple for Sirius XM to a 16.6x 2011 multiple for Netflix to show that Sirius XM’s multiple is still a discount to Netflix. Tinker currently has a SELL rating on Netflix.
He also compared Sirius XM to other traditional media companies, including Viacom (NYSE: VIA.B) and Time Warner (NYSE: TWX), to show that traditional media’s between 6% and 7% EBITDA growth rate was crushed by Sirius XM’s 5-year compounded growth rate of 24%. Tinker garners additional confidence for his $1.40 price target when considering his DCF (discounted cash flow) analysis, which yields a 12-month fair value target of $1.47. “Given SIRI’s potential 24% EBITDA compound growth rate over the next five years, we believe that a 14.5x 2011 EV to EBITDA multiple is reasonable and would take the stock to $1.40,” Tinker said. He does value Sirius XM’s ~$8 billion in NOLs (net operating losses) in his model and says that the NOLs should save the company $2.8 billion, assuming a 35% tax rate.
Remembering that “subscribers stuck with the company through the recession” and noting that Sirius XM lost a mere ~231,000 subscribers during the recessionary 2009, with subscriber growth now back on track, Tinker sees the company growing its subscriber base to 27 million by the latter part of 2014. He sees the auto market continuing to recover and is anticipating full-year 2010 U.S. vehicle sales to come in at 11.6 million, but sees this number continuing to improve to 13.7 million units by 2012. Tinker is forecasting 70 million installed satellite radios by 2014.
In a conversation with Mr. Tinker in preparation for this article, he told me that Sirius XM had a tremendous amount of penetration growth left. He spoke about how cable television’s penetration growth changed the conversation from “Do you have cable?” to “What do you mean you don’t have cable?” He sees Sirius XM’s penetration growth curve eventually shifting the conversation to “What do you mean you don’t have Satellite Radio?”
Disclosure: Long SIRI