Still Too Early to Buy Sirius - Merrill 30 comments
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Merrill Lynch analyst Glen Campbell initiated coverage on Sirius (SIRI) with a sell rating citing that it is too early for investors to step into the equity. The analyst places a $2.30 price target on Sirius, and while he does see merger synergies, he also sees many uncertainties going forward. The lack of any real company guidance can make it difficult for analysts to project performance. This could lead to more conservative stances. While such stances may be frustrating for longs, they will become very beneficial if indeed the merged company can outperform and over deliver. The issue however is that there is little concrete evidence to go on in assuming the merged company can hit the ground running.
REPORT EXCERPTS:
Prospects improved by merger, but a tough road near-term
We are initiating coverage of Sirius with a Sell rating and a fair value estimate of $2.30/share, a 20% discount to our YE2008E per-share DCF value of $2.89 pro forma the pending XM (XMSR) merger. The merger is likely to generate tremendous long-term cost and revenue synergies, in our view, worth $6.5bn in NPV terms. The share price is broadly reasonable in relation to our base case DCF value. However, top line expectations for 2008-09 continue to slide and still look too high. Refinancing the XM balance sheet at the merger closing will be costly, with substantial equity dilution possible. We believe it’s too early to buy the stock.
Post-merger base case looks OK but very uncertain
The long-term market potential for satellite radio is the key to valuation – but is highly uncertain. Our base case DCF valuation of $2.89/share assumes growth from 17mn subs at YE2007 (5.6% of the US population) to 40mn subs (12%) in 10 years; our valuation drops $1/share at 30mn subs and rises $1/share at 50mn subs. Substitutes (notably the iPod) have reduced the addressable market and will continue to do so, we believe. But the merger should help to offset this pressure with expanded content, tiered pricing and a simpler marketing message. So should the continuing growth in the rate of satellite radio pre-installation by car makers. With deep post-merger cost-cuts, EBITDA should turn positive next year, with margins nearing 40% by 2017E.
The near term looks tough
We expect subscriber growth to remain soft in a tough economy. For the two companies, we forecast 2.8mn subscriber additions for 2008 (653K for 1Q08). We believe our estimates are substantially below consensus.
Summary
We are initiating coverage on Sirius Satellite Radio with a Sell rating and a theoretical fair value estimate of $2.30/share. There are no reasonable comparable companies, in our view, so we have used a DCF-based valuation. The pending merger with XM Satellite Radio has received DoJ approval (on 24 March) but is still awaiting FCC approval, expected within weeks and considered very likely. Our base case post-merger YE2008E DCF value is $2.89 per share. We have applied a 20% public market discount to this valuation, which reflects:
1) the high level of uncertainty about the long term market size;
2) our view that near-term expectations for revenues and subscriber growth are still too high; and
3) the challenges of refinancing the XM balance sheet and the possibility of equity dilution.
We
note too that FCC transaction approval is believed to be likely, but is
not certain. We project substantial (50%+) downside in the share price
if the transaction is not approved. We model positive EBITDA starting
in 2009 and positive FCF starting in 2011.
Tyler Savery Position - Long Sirius, Long XM
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What does this "administration" have to do with it? The market did the damage to itself and then turned to the government with its hand out to fix a problem created by the inner beast. Greed.
Then, when the governement didn't react the way which was expected of, it the market complained that the government wasn't doing enough to fix it. Boo hoo - welcome to the reality of market economics.
Sounds like a case of the baker blaming the bread after he burns it.
To all, I advise this- Get in and stay in for the long haul. This stock is going to go UP in capital letters.
Does anyone think some sort of reverse split may be in the cards, to raise the stock price to a level that large institutions would consider investing in it? That sure backfired for Sun Microsystems.
I don't think anyone has a crystal ball on where shares will be going from this level, $2.47 today a.m. I do believe in the short term, we will see, post merger, up days of 5% -10%, with profit or break even day pull backs. Some of the pull back days will be investors taking small profits and a large percentage of weary investors just getting even and out. I think most agree that the trend will be up!
I do believe if you've been long this stock and believe that this technology is the best alternative for your vehicle, whatever that vehicle may be, that you should keep your seat belts on and enjoy the bumpy ride up in stock price.
Just a word about the technology. It is not a good competitor to the ipod or mp3. They represent different choices for portable prerecorded music, not for live radio broadcasts. Why do think Apple is not opposing the merger. Post merger, portable live broadcast products with prerecorded music features, will compete better with current mp3 and Ipod products, not car factory installed radios.
My last thought is, it's now up to the company, Mel and his folks, to deliver a profitable company to us. This will take some time as has already been explained by all the gurus and analysts, 18-30 months, but the signs will need to be there each and every quarter following the merger. They certainly have had enough time to decide on a direction, thanks to regulators, now it's time to show investors the way. If the signs of profitability are there, the stock price goes up. I am sure that Mel is bursting at the seams with information in this regard, and that it killed him to have to present annual results without being able to forecast future performance due to merger decisions being delayed.
Let's go FCC, approve the merger and let us get on with more pressing matters.
Capital Warrior, did you read something different from what I read here? This is the analyst opinion here, not his. The most Tyler did is explain his interpretation of the analysis.
From Investopedia.com, a Forbes company, heres is the formula:
DCF=[CF(1)/(1+r)(1)] + [CF(2)/(1+r)(2)]+...+[... where DCF= Discounted Cash Flow: CF(1) Cash Flow year one: and
r= discount rate (WACC), weighted average cost of capital for the years computing.
So there you have it.....any questions?
Disclosure- We are helpless at the hands of hedge funds and the genius of people running places like Merrill Lynch.
say something snappy like "Get Off Your Dead Ass and make a decision!!"
Thanx!
Send about a dozen a day. Th're slow learners.
Dauntless
On Apr 16 05:19 PM 163888 wrote:
> Pain, your are right we will see. I for one feel we are way closer
> to the end of this then the begining. While maybe not totally at
> the bottum we are close.
>
> Capital Warrior, did you read something different from what I read
> here? This is the analyst opinion here, not his. The most Tyler did
> is explain his interpretation of the analysis.
I have not sat on the sidelines for years. I have been long both Sirius as well as XM for years. The article is about what a Merrill Lych analyst sees, not me. I simply reported what the analyst noted. Please do not confuse my opinion with that of the analyst.
Cheers
I guess using a simple analogy is too low on the intelligence pole for someone with your enhanced intellectual fortitude. You go you super smart uber intelligent investor guy. Be proud in knowing you are smarter than this "slow" turtle...Another analogy that apparently is beneath your godlike I.Q.
I really could care less that you own a building by the way or about the view. I hear Manhattan smells great with all of the pollution. Two points for tooting your own horn. I bet you stare at yourself in the mirror for long periods of time telling yourself how sexy you look. You go you sexy beast.
Love
Turtle_bomb_squad