Sirius XM (SIRI) just announced its earnings and the quarter was very good, with the company meeting or beating street expectations on every metric. It has been quite some time since that has happened, and the stock is moving appreciably higher thanks to the good numbers.
An interesting dynamic in the quarter was the fact that Sirius XM has now included nearly $3 billion in Net Operating Losses (NOL's) in their financials. This creates an interesting dynamic for those seeking to value the company, and in particular for those that wish to look at the Enterprise Vale to EBITDA multiples. The main question is whether or not these NOL's should be treated like cash. If so, how does that impact the multiples?
There is no easy answer to the new question at hand. Essentially it depends on what you are trying to accomplish. If you want to compare Sirius XM to other media companies then the prudent move is to exclude the NOL's if those other companies are not in the same tax situation as Sirius XM. If you want to look at how Sirius XM will perform over the next couple of years, the NOL's definitely come into play. This could create some confusion going forward as when analysts speak to EV/EBITDA multiples people may not know which multiple is being applied. Hopefully this article will clarify this for investors.
In general, the company excludes the NOL's from EBITDA to demonstrate the viability of the company as if it were paying taxes. This is a prudent move. While the company will certainly enjoy benefits from the NOL's for many quarters to come, the essence of looking at the company is whether or not it is a cash machine without these temporary benefits. Additionally, most analysts will also exclude the NOL's for various reasons, the main reason being for comparison purposes.
In the chart below I have broken down how the NOL's impact the multiple when they are included as well as when they are excluded. As you can see there are some stark differences to the numbers depending on whether you apply the NOL's or not.
The Enterprise Value of Sirius XM decreases if you include the NOL's. This would cause the multiple to decrease as well. Here is where investors need to be careful and understand what analysts or writers are using when discussing the company. It is bad enough that many major sources get the market cap of Sirius XM wrong because they neglect to include the Liberty stake. This could potentially cause even more investor confusion going forward.
Sirius XM has always enjoyed trading at a premium multiple vs. other media companies. This happens because Sirius XM is able to generate cash and earnings in ways that other companies cannot really match. As Sirius XM gets into multiples above 20 it tends to sell off if for no other reason than the multiple is approaching the high end of any premium. Investors should bear in mind that many media companies trade at multiples of 9 to 12.
One thing that many investors tend to miss is that Sirius XM tends to be at the top of the multiple premium mountain. This is a blessing and a curse. It is a blessing because the company is getting a premium valuation from the street. It is a curse because being at the top means anything higher is uncharted territory and, being uncharted, implies a risk.
If you want to look at how Sirius XM is going to actually perform for several year to come, applying the NOL's to valuation multiples makes sense. This is because the NOL's are very real and carry a very real impact on the performance of the company. To not count them would be a folly. The key is understanding that they will not last forever.
The conservative and prudent move is to exclude the NOL's, but there is indeed good reason to include them as you look at the company. The fact is that Sirius XM does have these NOL's and many other companies do not. They will be a benefit to investors, and by extension should be considered. The logic is the same as the logic I apply to Sirius XM vs. Pandora. As an investor in Sirius XM I do not care whether Pandora makes money or not. Pandora is a competitor that Sirius XM has to contend with and thereby deserves consideration as a concern to my investment in Sirius XM.
Currently (at a $2.30 share price) the multiple will either be 15 or 19. If you want to be more conservative and be in tune with what the street does, use 19. If you want to consider the realized potential that the NOL's deliver use 15. The key is knowing whether or not the NOL's are being considered when you read an analyst report or an article about valuation on Sirius XM.
Disclosure: I am long SIRI.