Passionate investors in Sirius XM (SIRI) are well in tune with the prospects of the company, the guidance for 2012, and the outlook for many of the metrics that the rest of the street only seems to look at every quarter or so. Being that well in tune is great, but it can also present a frustrating situation as the street oft seems late to the game.
2012 has been a breakout year in many ways for Sirius XM. Throughout last year the street had hefted high expectations on the company and Sirius XM was at a challenge even to meet those goals. Throughout 2011 the company seemed to always be a step behind what the Street was anticipating, or framed another way, the expectations needed to cause the stock to run. It was a classic case of the Street building its own picture and the company trying to meet those expectations.
In 2012, and specifically in Q2, it is the first time in recent memory that Sirius XM actually met or beat all of the consensus estimates of Wall Street. Finally this company is getting some positive traction because it put in a quarter that was worthy of excitement based on expectations.
Currently Sirius XM sits atop 52 week high's and is in territory that has many wondering whether or not it can set the bar even higher. In this instance Sirius XM is in the precarious position of not yet having released 2013 guidance while trying to fill a valuation model based on what we now it will deliver for the remainder of 2012 with assumptions being placed on anything longer than 5 months out.
I am not expecting the company to put up any 2013 guidance until it reports the Q3 earnings. That guidance, when delivered will either confirm aggressive growth assumptions or temper them. It will be an interesting time for this equity.
What Would Safe 2013 Guidance Be?
Before going that far we should start with the current guidance for 2012 and then establish how much we expect the company to beat those metrics by:
- 2012 Subscriber Guidance is 1.6 million
- 2012 Revenue guidance is "Approaching $3.4 billion"
- 2012 Adjusted EBITDA is "Approximately $900 million"
- 2012 Free Cash Flow guidance is "Approximately $700 million"
Right out of the gate the assumption by everyone is that the subscriber guidance of 1.6 million will be low. After all, the company was already over 1 million through the first 6 months of the year, and the pace in auto sales should easily deliver more than the 600,000 needed to meet guidance. The most bullish of analysts, John Tinker of Maxim, carries an assumption that the company will deliver 1.78 million net subscriber additions this year. I think that even he is being a bit conservative here. I am currently estimating 1.85 million.
With that baseline understanding, I will split the difference between Tinker and myself and assume that the company will deliver 1.82 million in 2012. However, we will not know this until after Q4, and the company will likely deliver guidance in Q3. So what does Tinker expect for 2013? The answer is that the analyst is expecting 1.45 million subs, down about 20% from 2012's numbers.
Personally I see 2013 subscriber guidance being initially established at 1.6 million. This will be down from 2012, but a good starting point for guidance.
This is a good one to watch. Current guidance for Sirius XM in 2012 is "approaching $3.4 billion". That is a lot of revenue! The big question for 2013 is how much can the company improve on this metric?
One dynamic at play is the impact of the price increase. According to the company, 50% of the sub base has already been impacted. This could mean that by years end the company could have a substantial majority of the price increase baked in.
Let's go once again to analyst John Tinker for where he figures the company will be. Tinker believes the company will beat guidance in 2012 and deliver revenue of $3.43 billion. I currently carry an estimate of about 3.425 billion, so we could essentially consider it the same.
This would imply a beat on the 2012 revenue by both Tinker and my own model. Now we need to look forward to 2013. Tinker sees 2013 revenue at 13% and $3.86 billion. I am at to 4.01 billion, a jump of about 16%. Realistically speaking Sirius XM will tend to be conservative in initial guidance. I see the company setting the bar at "approaching $3.8 billion".
Sirius XM currently has Adjusted EBITDA guidance for 2012 set at $900 million. This number looks to be attainable. Analyst John Tinker sets the target at $928 million for 2012 which would imply Adjusted EBITDA growth of 26% growth from 2011 actuals. I see no reason to disagree that Sirius XM can deliver above $900 million. The next question is where we go from here.
Next year (2013) Tinker is carrying an Adjusted EBITDA model of $1.17 billion. This would imply matching the 26% growth that he anticipates in 2012. I am being a bit more conservative here. If you compare Q1 of this year to last Adjusted EBITDA rose 28%. In Q2 it rose 22%. Higher installations in OEMs drive some costs up, and that impacts EBITDA. I am holding for a 20% increase in Adjusted EBITDA and setting my target at $1.1 billion. This leaves us with where Sirius XM will set the bar.
I see Sirius XM issuing initial guidance for Adjusted EBITDA at "approaching $1.05 billion", implying just under 20% growth.
Free Cash Flow
This metric is a biggie. Free Cash flow demonstrates the ability of the company to continue operations in a profitable manner. Sirius XM has guided that 2012 FCF will be "approximately $700 million".
Tinker, the most aggressive analyst on SIRI, sets his 2012 bar at $740 million, and his 2013 estimate at an impressive $986 million (33% increase). Personally I see no reason to buck his estimate for 2012, but would be more conservative on the 2013 estimate with a 25% gain to $925 million. The delta between us is minimal, but it is simply the difference between how two people see things.
Where will the company come in? In my opinion they will be conservative and set the bar at "FCF approaching $900 million".
So there we have it, the potential guidance of Sirius XM for 2013. In review:
Potential 2013 Guidance
- Net subscriber additions of 1.6 million
- Revenue of "approaching $3.8 billion"
- Adjusted EBITDA of "approaching $1.05 billion"
- Free Cash Flow of "approaching $900 million"
What does all of this mean? Well, when the company initiates guidance for 2013 the street will finally catch up to what savvy investors already know and have modeled. All of this guidance bodes well for Sirius XM and justifies a price target of at least $3.00 per share and as high as $3.50 per share. Throw other things into the equation like resolution to the Liberty Media (LMCA) situation, a good result on the royalty rate hearings, and positive traction with satellite radio 2.0 and you can see that this equity is headed up.