By Demian Russian
With a new research report issued on the heels of Sirius XM Radio's (NASDAQ:SIRI) Q2 earnings results and conference call, RBC Capital Markets Global Media Analyst David Bank maintains his previous Sector Perform/Speculative Risk rating and reiterates his $2.00 price target on Sirius XM Radio's stock.
"Solid fundamentals, but valuation is relatively full."
- David Bank, RBC Capital Markets
While Bank describes Sirius XM's second quarter results as being "solid" and notes that "expense trends are stronger than we'd have expected," he views management's full-year 2012 adjusted EBITDA guidance increase from $875 million to ~$900 million as being "modest" and "roughly in-line with prior consensus."
Bank expects Sirius XM will have to pay more in music royalties as a percentage of revenue following a Copyright Royalty Board (CRB) decision on Sirius XM's music royalty payment requirements expected in late 2012. While Bank expects a modest increase in the company's music royalty expenses on this decision, he says forward estimates are already discounting this.
As the recent price increase rolls out, now affecting ~50% of the subscriber base, Bank sees key drivers remaining steady, citing a Q2 conversion rate of ~45% and a ~1.9% self-pay churn rate. "While we assume new car OEM penetration will remain ~66%, we estimate there are ~23mm inactive radios on the road which will help drive net additions as the used car market matures," Bank said. He also noted his expectation for a decline in full-year 2013 paid promotional net subscriber additions, due to a reclassification of General Motors (NYSE:GM) promotional subscribers. As a result of the renegotiated terms under the new GM contract, Bank expects GM's promotional subscribers to no longer be counted as "paid promotional" subscribers.
Bank sees Sirius XM's FCF (Free Cash Flow) as likely continuing to grow materially over the next few years. With Sirius XM management continuing to indicate that they are not seeing any strategically important acquisition targets out there, Bank sees Sirius XM's FCF generation conceivably fueling stock buybacks amounting to over $500 million a year in the next few years.
Noting that Sirius XM CEO Mel Karmazin's employment contract expires at the end of the year, Bank expects some indication of progress regarding negotiations with Sirius XM's board to come on the third quarter earnings call.
Commenting on Sirius XM's current situation with Liberty Media (NASDAQ:LMCA), Bank said, "SIRI isn't really in control of it's own destiny, but then again, what public company is (though most don't have a 45% single shareholder)?"
Several previous Playground Radio interviews with RBC Capital Markets Global Media Analyst David Bank are available for streaming or download in the Playground Radio Archive.
Disclosure: Long SIRI