A few months ago we penned an article stating our view that Sirius XM (SIRI) is a relatively expensive stock and we would rather wait for a pullback before buying the shares of what we view as a great company with a solid growth trajectory. The shares now trade at 16x 2011 EBITDA, even with the recent pullback due to the Japanese earthquake and tsunami.
That topic of valuation came up in several investor conferences in which both Sirius XM and Liberty Media (LCAPA) management presented.
In one presentation, Liberty Media's CEO, owner of 40% of SIRI shares, agreed with us that the shares are expensive. Here he is at the Deutsche Bank Media and Telecom conference:
"Look, their stock has had an enormous run. On a current multiple of EBITDA, it is not an inexpensive stock. On the other hand, we have enormous confidence in this business, and we have enormous confidence in its growth potential. So you weigh the two. Mel will get mad at me for saying it's at a big multiple, but that's math.”
We too have confidence in the business but what he has essentially said is that Liberty Media likely will not buy more shares above the 40% they currently own at these prices, until March 2012, when their investment options change. We have never known John Malone to overpay for an asset.
The good news for SIRI holders is that Liberty is stating that it will not sell any of its 40% stake. Here is Liberty Media's CEO at the same conference:
“So our flexibility, I think, increases over time in terms of how we want to do something. We've talked about alternatives, from us buying 50 over 50, us buying control, us doing a spin, us doing a spin-merge. All those are still on the table. I suspect that us selling the stock for cash is probably not on the table, but all the other ones are. And we'll look at the alternatives we have for our capital, we'll look at where we think the business is. We'll look at what the valuation is, we'll look at what we can get done.”
Notice that he mentioned the pesky valuation issue as a concern in what they are able to do.
On a more positive note, it looks like SIRI is ready to institute price hikes when the price hike restriction from the merger is lifted in August. A price hike will likely come in 2012 we believe and it will likely be in the $1 range, although we are hearing a more aggressive $2 figure. At $1 and with 13 million self-pay subscribers, assuming the price hike is across the board, that’s $156 million of additional EBITDA. If you added that $156 million to this year’s EBITDA, that 16x multiple reduces to 13x. If you added the $156 million to 2012 EBITDA estimates, then the 2012 EBITDA multiple becomes 11x.
This is what CFO David Frear has to say on the issue at the Credit Suisse Group Convergence Conference:
“Price hikes, they're always possible. As I think most people know, the FCC merger order put some constraints on us in terms of what we can do. Now the merger order is set to expire in late July, right around August 1st. And the FCC does have a notice of inquiry out, has asked for comments on whether or not they should extend the merger order. We filed a document with the FCC that said that we don't think that the merger order should be extended, that our voluntary commitments on pricing did not include a voluntary commitment that contemplated the prices going beyond three years. The FCC has acknowledged that that's the case, that we did not voluntarily commit to do that. And so, in essence, the commission would have to decide that it has the legislative authority to regulate satellite radio prices, which we don't believe they have. There have been a bunch of comments that have been filed, most generally supportive of the FCC not seeking to regulate business. The only comment that I can think of off hand that was filed in support of extending the price increase was actually filed by a law firm that's seeking to sue us on anti-trust matters. So they've got pending litigation and they've filed something in front of the commission to support their point in litigation. I do expect the merger order to expire according to its terms in the summer. That would give us the opportunity, if we chose to, to increase prices, whether it's later this year or next year or the year after.”
A last note on the valuation issue. We do acknowledge that on an intrinsic basis, SIRI is growing EBITDA in the high teens range over the next few years. That growth rate should support the current multiple.