In our last article, we recommended a long position in Sirius XM radio (SIRI) due to its upside potential. This article is an update, and it substantiates our previous thesis of buying SIRI. The company's 8K filing is the formal announcement of Liberty Media's (LMCA) FCC application for a takeover. Also, SIRI Radio vehicle installations and subscriptions are set to increase, according to the latest press releases, and the company is replacing costlier debt with cheaper senior notes.
Takeover by Liberty Media
In our previous article, we had mentioned LMCA was interested in gaining control of Sirius XM by buying shares and converting its preferred stock. It owns more than 48% of Sirius. The company had said that it would be delaying Reverse Morris Trust for at least six months. The CEO of Liberty Media had said they believed that Sirius was underleveraged and there was room for share repurchases.
Sirius XM filed its 8K on August 17, stating that LMCA had filed an application with the FCC for de jure control of SIRI. LMCA would be able to take over control of Sirius within 60 days of getting the FCC's approval for transfer of the airwave-license.
Radio Installation and Subscriptions:
A couple of days ago, SIRI announced that Sirius radio has now been installed in more than 50 million vehicles. The company's radio service encompasses every major carmaker in the U.S. The owner of these new cars would have access to a free trial for the service (e.g. 3-month trial for new Toyota (TM) cars), which could lead to more subscriptions. 95% of the company's revenue came from subscriptions.
This year, Sirius XM radios will be factory installed in 70% of all new vehicles sold in the United States. According to Jim Meyer, president Sirius XM operations and sales, there are plans for doubling factory installations to 100 million by 2018.
The company is also focusing on radio subscriptions for buyers of used car. For this purpose, the company announced yesterday that a 3-month subscription would be given to buyers of used cars (Toyota and non-Toyota), equipped with satellite radio, from participating Toyota dealers in the U.S. In addition to a radio service, SIRI would also be giving 3-month subscriptions of its NavTraffic (traffic information) service for Toyota vehicles that are equipped with navigation. Among other Sirius XM services that would be available to select vehicles are weather forecasts, fuel prices and updates on sports.
New and old vehicles subscriptions from these initiatives will help the company achieve its target of 1.6 million net additions this year. These additions would take the subscriber base to 23.5 million from the present 22 million.
SIRI had recently priced 5.25% senior notes that are due in 2022 at $400 million. The company intended to use the proceeds for purposes like repaying debt (senior notes due 2013) and repurchases.
On August 21, the company announced that it will redeem $681 million of 13% senior notes, 10 months prior to maturity, on September 20, 2012. The company will be paying the present value of the principal and the remaining interest payments. This is an attempt to replace older costlier debts with lower interest debts.
The company had cash of $868 million according to the most recent quarterly result. The operating cash flow was $623 million (trailing twelve months). The interest coverage ratio is 2x. Hence, debt is not an issue for SIRI at the moment.
The following is an excerpt from the company's press release:
"Pro forma for the 13% Notes Redemption, the previously announced redemption of its 9.75% Senior Secured Notes due 2015 and the issuance on August 13, 2012 of $400,000,000 of 5.25% Senior Notes due 2022 (the "5.25% Notes"), Sirius XM would have had $2,441,095,000 of total long-term debt as of June 30, 2012."
SIRI had recently posted healthy financials with a 13% jump in revenues over last year's quarter and record net additions for its radio subscriptions. Analysts have been positive about the third quarter results for SIRI, as Q3 EPS estimates have been raised to $0.03 in last few weeks.
The stock is up 37% YTD, and its 52-week high value is $2.64. The short ratio is 8 days. No analyst polled by Reuters gave the stock an 'underperform' or 'sell' rating, reflecting positive sentiments regarding Sirius XM.
The price-to-free cash flow for SIRI is 18x, as compared to CMLS' 5x. The P/S multiple for SIRI is 3x, as compared to P's 5.4x and CMLS' 0.5x
In 2015, the company is expected to bring in $4.5 billion in sales. With P/S of 3x and 3.82 billion outstanding shares, the valuations come out to be near $3.5. The long term earnings growth estimates for SIRI are 22%. Using its current P/E of 25x and 2015 EPS estimates of 22c, the target price comes out to be near $5.5. If the subscriber growth continues, we think that market will start valuing SIRI on normalized earnings. SIRI's subscriber growth will be a function of how the U.S auto market performs.
To reiterate, we recommend buying Sirius in order to benefit from the upside mentioned above, and from the initiatives taken by the management to increase subscriptions and refinance debt at lower interest rates.