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Sirius XM's (SIRI) share price has now dropped to such a ridiculously oversold level. It doesn't reflect the average analyst opinion and price target. On Friday, Merrill Lynch reiterated a Buy to its private wealth clients.
Merrill notes:
"Modest subscriber upside; revenues in-line. Retail net adds of 33.6k improved from 1Q08 net adds of just 2.5k and above our 6.5k estimate. Improvement in retail and an increase in the conversion rate to 48% from 47% in 1Q08 are encouraging signs that consumer adoption of satellite radio remains strong even as the subscriber base expands into more mainstream demographics/incomes."
Furthermore, Merrill addressed the weakness sparked by GM's disappointing sales numbers by stating, "246k OEM net adds were 3.5% below our estimate and reflect the weakening U.S. auto sector. With penetration in new auto production projected to climb to ~70% in 2009 (from ~50% in 2008), we expect the OEM channel to re-accelerate."
Although revenues were in-line with estimates, EBITDA was over 30% better than expected (loss of 24 MM vs 35 MM). This was due to SIRI's strong execution of strategic cost reduction initiatives. The merger will give SIRI the opportunity to extend such initiatives and achieve positive EBITDA and Free Cash Flow in 2009, as indicated by CEO, Mel Karmazin.
The recent sell-off was partially due to misinterpretation of EPS dilution. XM announced a $550M offering of Senior Subordinated Notes due 2014, which will be exchangeable into Sirius stock. Concurrently with the Notes offering, Sirius commenced an equity offering. Sirius will not receive proceeds from new shares, except a nominal loan fee. Because the borrowed shares must be returned to Sirius upon maturity of the Notes, they will not be considered outstanding for accounting purposes and will not be included in EPS calculations.
Merrill reiterated their Buy rating and $4.50 price objective for the combined Sirius-XM.
Although I don't see $4.50 per share within the next year, I am betting Mel will give investors some very encouraging news this week when discussing the company outlook. Terrestrial radio execs put the brakes on SIRI, making it one of the most delayed mergers in U.S. history. But, now all the weight is on the accelerator. Any short on SIRI would be smart to cover on SIRI and take profits, because the current share price offers very low risk and extremely high potential returns.
Disclosure: Long SIRI
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This article has 20 comments:
He's also expecting Mel will give investors some very encouraging news this week. He believes the share price will move back over $2 after the earnings report and says smart shorts will cover ahead of earnings.
Investment club member highlights:
"Mel has always under promised and over
delivered on his forecasts since he
joined Sirius. You can bet if he said
400m in Synergies in 2009 , it will
be at least 500m to 600m !!!
Sirius doesn't
have to refinance any debt for years.
2.0 Billion of the long term debt is not
even due for over 5 YEARS and by that
time the Markets will probably have
recovered and more reasonable financing
would be available.
Retail
subscribers slowed because the merger
was in limbo for 17 months !!! Last
QTR Sirius/XM added over 2.0 Million
in NEW OEM gross adds. Even through
car sales are way down Sirius and XM
both had record new OEM adds because
the OEMS percentage wise are installing
more Satellite Radios with penetration
rates over 70% for the 2009 model year.
Sirius and
XM have an excellent pool of management
talent and the combination of the
new company will allow them to take the
management talent from both companies
and retain the best employees after
synergies.
Sirius has gone from 100k subscribers
and revenue of $67M in 2004 . To 18.5
Million subscribers and $2.2 Billion
in annualized revenue over a 4 year period."
Get your teeth fixed man.
I own a few thousand of these shares and didn't build in any stop loss. So, needless to say, I'm down a few quid. I ain't buying anymore till this thing gets turned around. After being an owner for all these years and the "misunderstood dilution" that should have been a period of joy for long shareholders, mr. MK can jump off a cliff. I say get another CEO in there.
Get your teeth fixed man.
Any other CEO would have given up on the merger months ago. The fact is Mel kept his ground knowing the upside to the merger. Mel has always been upfront with investors and will continue now that merger is complete. I can't think of anyone else that would do better than Mel in this economy. sdj
Other than anti-Bill Miller articles, SIRI is almost the only other stock that seems to get replies. Another point to ponder is that where would the Sirius stock price (now $1.46) be if all these rabid shareholders were not heavily invested.
No other stocks seem to get this kind of love and yet here it is at barely over a buck. What would happen if that "love" fails?
I only ask the above because I was thinking about buying.
Merrill notes :Modest subscriber upside; revenues in-line
Retail net adds of 33.6k improved from 1Q08 net adds of just 2.5k and above our
6.5k estimate. Improvement in retail and an increase in the conversion rate to
48% from 47% in 1Q08 are encouraging signs that consumer adoption of satellite
radio remains strong even as the subscriber base expands into more mainstream
demographics/incomes. Sirius’ self-pay churn of 1.6% improved from 2.1% in
1Q08 and was slightly better than XM’s 1.67% 2Q08 self-pay churn. 246k OEM
net adds were 3.5% below our estimate and reflect the weakening U.S. auto
sector. With penetration in new auto production projected to climb to ~70% in
2009 (from ~50% in 2008), we expect the OEM channel to re-accelerate.
SAC improvement drives EBITDA upside
Revenues in-line with our estimate at $283mn (+25% Y/Y), but SIRI held costs flat
Y/Y (versus our 4% projected growth), yielding a projected EBITDA loss of just
$24mn, versus our projected $35mn EBITDA loss and 1Q08 loss of $39mn. 25%
subscriber and revenue growth with 0% cost growth reflects SAC improvement
and the high operating leverage of the satellite radio model, with 70% contribution
margin from new subs. Sirius alone is quickly approaching EBITDA breakeven,
and merger synergies with XM should accelerate EBITDA and FCF growth.
Wrapping up XM merger details
XM announced a $550mn offering of Senior Subordinated Notes due 2014, which
will be exchangeable into Sirius stock. Concurrently with the Notes offering, Sirius
commenced an equity offering to facilitate hedging the new Notes. Sirius will not
receive proceeds from new shares ($375mn initially and up to $65mn additional
shares), except a nominal loan fee. Because the borrowed shares must be
returned to Sirius upon maturity of the Notes, they will not be considered
outstanding for accounting purposes and will not be included in EPS calculations.
Investment summary
Strong operating leverage and high contribution from new subs should drive an
acceleration in EBITDA and FCF. Improving trends in retail and improving
conversion rates in the OEM channel should allow Sirius/XM to capitalize on the
more widespread availability of satellite radio in the ~245mn U.S. auto fleet. We
reiterate our Buy rating and $4.50 price objective for the combined Sirius-XM.
MY ADVICE DON'T BE TRICKED INTO SELLING BUY AS MUCH AS YOU CAN THIS WILL MOVE UP BACK OVER $2 SOON.
I thought the wink wink nod nod party line out of them was this stock is worth a buck, a la Chris Wanky (weinke).
Also: Traders Desk e-mail message
XM and Sirius previously traded hugely over-valued, when compared to their Book Value (P/B Ratio). Sirius, for example, had a book value of ($0.56), while they traded at $2; while XM’s was ($3.43) and they traded at $10.The current Pro-Forma Book Value is approximately $1.62 — and the stock is trading at $1.46. In other words, it is undervalued… for the first time ever. I wonder how many on the Street actually looked at the Pro-Forma condensed financials of the company filed last week? Given the fact that the Street had routinely overvalued this sector as individual companies — the fact that is undervalued as a merged company is interesting. Interesting because, if they can demonstrate some of what they’re claiming… then this undervaluation will likely correct quickly.
Last Friday I coverd a large short position and added a long position in SIRI I expect stock will see a Earnings run up this week to $1.75 range to $2 possible & I expect the stock will trade around 1.5x Book value before years end around $2.50 to $3 a share.
Watch for UBS to upgrade SIRI they did the deal & are buying on the open market Friday they crossed in 2 large blocks 9.7M & 7.6M.
That's the number of shares authorized for SIRI.
Pre-merger SIRI shares: 2,500,000,000
You do the math, Einsteins.