Barrington Maintains Outperform Rating on Sirius XM

Nov.14.10 | About: Sirius XM (SIRI)

By Demian Russian

In a research note issued on the heels of Sirius XM Radio’s (NASDAQ:SIRI) reported third quarter results [see transcript], Barrington Research Associates senior investment analyst covering the media and entertainment industry, James C. Goss, again maintained his OUTPERFORM rating. Just recently, on September 24th, Goss moved his 2010-based $1.25 target price to a 2011-based target price of $1.50. ”SIRI has already passed this initial target after little more than a month. The combination of increased subscriber growth targets plus another favorable financial move with the note offering no doubt are playing a role in broader acceptance of the viability of the company’s fundamental strategies and ability to execute,” Goss said. While Goss did reiterate his OUTPERFORM rating, he did not adjust his $1.50 price target at this time, simply stating, “We will more fully evaluate our estimate details and the implications for our target price calculation.”

Goss saw Sirius XM’s Q3 results matching up with the company’s pre-announced subscriber metrics, which the company announced on October 13th. Sirius XM reported third quarter net income of $67.6 million, or $0.01 per share, which beat his estimate of $18.7 million, or $0.00 per share. Q3′s reported adjusted EBITDA of $169.7 million slightly topped his $168.3 million estimate. Adjusted revenues for the quarter came in at $722.5 million, inline with his $723.0 million estimate. Noting management’s raised guidance for full-year 2010 revenues of at least $2.8 billion and for adjusted EBITDA of ~$600 million, Goss said that he is estimating full-year revenue to exceed management’s guidance of $2.8 billion and for full-year EBITDA to reach $614 million. Goss is estimating a year-end subscriber total of “just under 20.1 million.”

While Sirius XM’s pre-announced third quarter net subscriber additions of 334,727 beat his prior estimate for 317,712 net adds, Q3′s reported SAC of $59 also beat his $66 estimate. ARPU of $11.81 came in just below his $12.01 estimate. Goss also noted that the conversion rate improved to 48.1%. Pointing to Sirius XM’s breakdown of the subscriber mix between Sirius and XM, with the company reporting a total of 10,218,265 XM subscribers and 9,643,910 Sirius subscribers as of the end of the third quarter, Goss said, “It is quite likely the XM advantage will persist since roughly 62% of the OEM relationships are with XM, and the OEM channel has become the key driver of subscriber growth.” He also added that, to a large extent, this metric no longer really matters much as most of the programming is identical on both services, with the exception being some of the premium programming available to subscribers via the “Best of Sirius” and “Best of XM” packages.

Commenting on Sirius XM’s recent financing moves, successfully closing a $700 million note offering due 2018 at 7.625% and the repurchase of of 11.25% debt due 2013, Goss views this extending of maturities and lowering of the interest costs as a big positive. “We regard this as quite an accomplishment since about 19 months ago the company was essentially forced to borrow at 15%, plus warrants equal to about 40% of the equity value of the company in order to stave off bankruptcy,” he said.

Sirius XM Radio will be presenting at the 3rd Annual Barrington Research Consumer, Media & Business Services Conference on December 9th, 2010 at the Four Seasons Hotel Chicago.

Disclosure: Long SIRI