Buyback And Takeover Chatter For Sirius; CBS Looks Solid

Feb. 9.12 | About: Sirius XM (SIRI)

With Sirius XM (NASDAQ:SIRI) accelerating into profitability, takeover chatter will inevitably increase. More likely, however, we can expect to find pandemonium from the company releasing a capital allocation policy that reinforces positive outlook over free cash flow. Since I first promoted the firm here, the stock has risen by 19.4%. While this is a strong return that more than doubled that of the Nasdaq over the same period, the bull run still has much more to go. Compared to CBS (NYSE:CBS), a veteran media business, Sirius XM provides more of a attractive as a next-generation source of revenue.

From a multiples perspective, Sirius XM appears (falsely) expensive. It trades at a respective 71.7x and 30.7x past and forward earnings while CBS trades at a respective 16.8x and 13.1x past and forward earnings. The firm (rightfully) is, however, rated a "strong buy" versus just a "buy" for CBS. From strong subscriber momentum to abundant monetization opportunities, Sirius XM is one of my top picks for 2012.

At the third quarter earnings call, Sirius XM's CEO, Mel Karmazin, noted strong progress:

SiriusXM continues to execute well in a challenging macroeconomic climate. We were able to drive our company's operating results to a new record level of subscribers as well as a record quarterly revenue and record adjusted EBITDA. To put it simply, subscribers remain excited about the value and depth of our entertainment offering, and we have a great business model for our investors to be excited about as well.

Fourth quarter 2011 net subscriber addition was 22.7% higher than expected at 540K. This is being driven, pun intended, by faster momentum in US light vehicle sales coupled with strong conversion rates. Margins are set to further expand as revenue and cost synergies are unlocked from the merger with XM. Going forward, the company will be pushed to the negotiating table with Liberty (NASDAQ:LMCA) and a takeover premium will lift upside further.

Turning over to CBS, we have a company that is solid in its own right. TV studio syndication revenues and higher margins are making a bull case increasingly more attractive. As the political season pick ups, the ad market is heading towards an inflection point off a strong local momentum. With a 10% free cash flow yield, management is likely to get aggressive on repurchasing shares - an optimal way to unlock value.

Consensus estimates for CBS' EPS forecast that it will grow by 70.3% to $1.89 in 2011 and then by 20.6% and 14% in the following two years. Modeling a CAGR of 32.8% for EPS over the next three years and then discounting backwards by a WACC of 9% yields a fair value figure of $32.18, implying 8.6% upside.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.