By Brian Newman Rayl
Maxim Group Senior Media Analyst John Tinker reiterated his BUY rating on Sirius XM (NASDAQ:SIRI) and upgraded his price target to $2.20 following Sirius XM’s fourth quarter and full-year 2010 conference call Wednesday (see earnings results here and earnings call transcript here). He maintains his forecast for $740 million in EBITDA “despite conservative guidance” from Sirius XM. Tinker initiated coverage in August 2010 with a BUY rating and a price target of $1.40. He reiterated his BUY rating and upgraded his price target to $1.80 in November of 2010.
Tinker’s 2011 $740 million EBITDA estimate represents 18% growth year-over-year. He indicates that Sirius XM is conservatively assuming 12.5 million new car sales for 2011, well below Maxim’s projection of 13.1 million auto sales for the year. His EBITDA estimate also assumes a higher EBITDA margin of 24.2% versus the 22.1% Sirius XM reported for 2010. Tinker also estimates EBITDA of $940 million for 2012, but noted that a price increase by Sirius XM late in 2011 could provide for some upside potential to this number.
Sirius XM exceeded Tinker’s estimates for FCF (Free Cash Flow) for 2010, reporting $210 million versus Tinker’s $176 million. Tinker maintains his FCF forecast of $379 million for 2011 and $724 million for 2012. According to Tinker, Sirius XM is comfortable with 3x debt/EBITDA in 2011, which suggests they have ~$100 million of buying power this year and ~$150 million in 2012 to buy back shares. Timing of a share buyback is unknown due to Liberty’s (LCAPA) stake and the restrictions regarding the approximately $8 billion in NOLs (Net Operating Losses).
Tinker’s upgraded price target to $2.20 is based on 16x estimated 2012 EV (Enterprise Value) with a growth rate of 27%. The company is currently trading at 16.8x 2011 estimated EV with a growth rate of 18%. He believes Sirius XM should trade at a premium due to its long term 24% EBITDA growth rate, compared to traditional media stocks which are only growing EBITDA in the single digits. Tinker’s DCF (Discounted Cash Flow) analysis indicates a 12-month fair value of $2.26.
The continued ability of SIRI to execute by growing subscribers and while managing costs with the resultant margin improvements, increasing free cash flow, potential of used car market, XM SIRI 2.0 channel expansion and opening of the Hispanic market, potential to increase pricing and the anticipation of a share buyback all result in this becoming one of the most valuable media franchises in the business, in our opinion.
– John Tinker, Maxim Group Senior Media Analyst
Tinker notes that Sirius XM’s stock currently has an institutional ownership of ~25%. Including Liberty’s stake, institutional ownership is ~50%. Traditional media companies maintain ~80% institutional ownership, suggesting potential continued appreciation for Sirius XM’s stock.
Disclosure: Long SIRI