In our last article, we supported our bullish stance on Sirius XM (SIRI) due to its growth in subscriptions since the start of the year, as well as an expected increase in factory vehicle installations. In addition, the company has also been refinancing its debt to make it less costly; takeover talk by Liberty Media (LMCA) was also helping with stock price appreciation. The stock is up 35% in the last three months (most of the appreciation was in August, based in share buyback talks, new installation data, and relevant options for customers of used and new cars). This article is an update on our investment thesis; and we remain bullish on SIRI.
In Liberty's earning call in early August, CEO Greg Maffei had hinted at an "opportunity for share repurchase" at Sirius XM. Barclay's analyst estimated a possible buy back worth $1.1 billion-$2.9 billion by 2013. The company has operating cash flows of $623 million (trailing twelve months) and total cash of $868 million. This means that the company might have to take on debt if it is to repurchase roughly more than $1 billion plus of shares.
There is news that LMCA might hold on to SIRI shares for some time, after it reaches its "more than 50%" stake target in SIRI, instead of an immediate spinoff through Reverse Morris Trust (RMT). Once RMT happens, the primary question will be regarding the premium that SIRI shareholders will get. Karmazin, the CEO of SIRI, had asked for a premium for SIRI shareholders in any deal with Liberty. Karmazin's term will finish by the end of the year, and his re-appointment is not unlikely.
The FCC (Federal Communications Commission) has still not approved the de jure control application filed by Liberty, but the acquisition clearly seems to be taking place with Liberty continuing to increase its ownership, and after the recent conversion of almost half of its SIRI preferred stock to common stock. According to the SEC filing, LMCA's ownership has reached 49.5% after conversion. This conversion had led to the recent price decline, although the stock has recovered. Any dips like these are good entry points for investors.
Business Operations Update:
The company, in addition to increasing factory installation of radios in new vehicles, is continuing to focus on used vehicles as well. 6,000 dealers from across the U.S. are a part of the program to give free 3-month subscriptions to used car (with factory-equipped satellite radio) customers. Hendrick Automotive Group, with 84 dealerships, was recently added to the list.
The on demand service launched in August is another good step by SIRI. The company expects to expand this service in terms of content as well as bringing it to Android devices. This is similar to Pandora (P), except with subscription for revenues instead of ads.
Apple (AAPL) is planning to enter the internet radio market in competition with Pandora. Though it is not an immediate threat to SiriusXM, as SIRI is a satellite based radio, Apple's entry can help popularize the internet radio/streaming audio service within vehicles, at the expense of SIRI in the long run. SIRI gets 95% of its revenues from subscriptions and ad free radio services. Apple's service will likely be supported by advertisement revenues.
Recently, call options have been outnumbering puts, showing the bullish sentiment in the market regarding SIRI. The October 20, 2012 calls with a strike price of $2.5 have an open interest of 11,790 as compared to put's open interest of 1,527, according to the NASDAQ.
The price-to-free cash flow multiple for SIRI is 19x as compared to Cumulus Media Inc. (CMLS)'s 4.9x. SIRI's EV to EBITDA is 11.5x, while the figure is 10.3x for CMLS. Other competitors include CBS Corps (CBS)' CBS Radio and Pandora.
Purchase of shares by Liberty is probably helping the price stay around the $2.5 mark. We recommend a long position because the continuously increasing subscriber base bodes well for top line growth in the future. Share repurchases, although the amount can be disputed, will also benefit investors.