Analysts on Sirius: Merrill, Goldman See Gloom, Barclays Sees Upside 41 comments
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After what has been virtual silence in the street this week, a few investment bankers have peeked out from the bunker to offer their latest opinions on Sirius XM Radio (SIRI). Merrill, which is now part of the Bank of America (BAC) family, and Goldman (GS) have doubts about the prospects of stock performance, while Barclays (BCS), now the proud owner of Lehman Brothers, sees the stock more than doubling by year's end.
MERRILL LYNCH
Downgrade to Underperform; PO of $1.00 “We are downgrading SIRI to an Underperform with a price objective of $1.00. The recent dislocations in the credit markets have significantly increased the risk associated with upcoming refinancings, negatively impacting our estimate of the company’s cost of capital and equity value. We still like the fundamentals of the underlying business and believe there is a good chance Sirius will be able to refinance, but we think the downside risk is too great to maintain a Buy rating.”
Thus, while Cohen likes the business model, the financing is a big overhang, and until there is clarity in this aspect of the company, do not look for Cohen to adjust things to a bullish outlook. However, should the financing get taken care of, Cohen may well become bullish in a short timeframe.
GOLDMAN SACHS
Weinkes of Goldman was already a satellite radio bear, so the details of his report were not much of a surprise. The analyst took his price target down to 50 cents. Citing churn and the credit situation as the major factors, Wienkes sees still more downside and thus arrived at half a buck for his six month price target. The analysis of churn by Wienkes seems to indicate a lack of understanding of that aspect of the business, but regardless, the credit opinion is sound in that perception is bad on debt across the board.
“We continue to rate SIRI shares Sell and our price target is $0.50. We still see a viable market for satellite radio, SIRI’s niche, in our view, with a sole provider subsidizing mass market distribution and programming. Our base conclusion of overstated equity valuation relative to the expected FCF opportunity matches our prior analysis; however, the nature of our concerns has shifted toward the viability of the business model given current sub economics. That is, we believe the company will need to add roughly 8.5-9mn gross subs just to net 2mn new subs in 2009.”
BARCLAYS
Less than a week after the Barclays logo appeared on the Lehman Brothers building, the company has initiated coverage on Sirius XM Radio with a buy and a $1.80 price target, which is more than double current prices.
“Initiating coverage on SIRI with a 1:OW rating and a $1.80 YE 08E price target (driven by DCF), which represents approximately 27x 09E EBITDA of $273MM. This is a change from our previous $2.10 price tgt, due to a higher interest rate in our DCF calculation, reflecting credit market conditions. Company’s future driven by growth of auto OEM segment, combined with cost benefits from XM/Sirius merger synergies. 09E EBITDA est $273MM vs. $300MM guidance. Key near-term risk is need for refinancing of approx. $1.2BN in maturing debt in 09E”
Position - Long SIRI, No Position Investment Banks
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This article has 41 comments:
This is OUTRAGEOUS!! I really feel for MEL and SIRI. Man, how much unholy sh%# can one company have thrown in their face? F Goldman and F Merrill. Two loser companys with bad management.
And Tyler, Brandon, sorry but you guys need to check yourselves.
Churn being subscriber deactivation measured against total subscribers, which ran at 2.8% for Sirius in the 6 months ending June 30, 2008, a significant increase YOY from 2.1% in 2007. ARPU being Average Revenue Per Unit subscribed was $10.45 vs $10.59 for the same YOY period. SAC being Subscription Acquisition Cost was $84 vs $104 for the same 6 month YOY period. These numbers are for Sirius Stand alone. Each company, SIRI and XM, counted subscribers differently and it is not clear how they will count them moving forward. Using pre-merger churn to evaluate future performance is a non starter and then to apply it to both set of OEM contracts gets you further down the rabbit hole to nowhere.
My point is that each analyst is going to be dependent on the company's detailed reporting over the next year to be able to adjust these past metrics to future performance metrics of the combined company. Unfortunately the analysts motivated towards negative reviews will confuse these differences, trying to drive the SP down.
With all of the new programs for generating revenue, these metrics may become irrelevant from a YOY viewpoint. Today the merged company is not the stand alone companies they were competing for revenue, content providers, and subscribers. These companies have always been difficult for analysts to fairly compare performance in the past due to their reporting and OEM contract differences.
The future company reporting will be confusing to those not willing to do their homework to understand how revenue from new programming ideas will effect these metrics, both positively and negatively in the future. Also the actual metric numbers may become totally irrelevant depending on the revenue generating directions the company takes. Regardless of their effect it will be David Frear's job to clearly define how changes will impact the bottom line.
In my opinion there aren't any good formulas available for accurately projecting how subscriber growth alone will be able to forecast revenue growth, expense reduction, and in the end profitability until the company defines it's new accounting and operating metrics. Probably why changing Accounting Firms was a good idea at this time.
Correct, no bank has any credibility, and to post their opinions is important however, but only to look at it through correct lenses. You can see hints and clues in everything. I read enough of what I knew in those reports to agree with our opininons on this stock being undervalued. Post what they say, but dont be naive about the reporting of the information, and what it is saying between the lines.
NONE!!! Zero. Id rather here a whino on the street give me his take on it.
TO POTENTIAL INVESTORS CONSIDERING SIRIUS XM:
If you have just read the latest articles posted on Seeking Alpha about recent analyst opinions regarding Sirius XM, I urge you to continue your search for further opinions about the company (SIRI). Some of you may or may not know that two of the opinions being reported in these recent articles, authored by Tyler Savery and Brandon Matthews respectively, are completely un-credible. The opinions I refer to are from Merrill Lynch and Goldman Sachs. Here's why...
Merrill Lynch is a former independent investment banking firm (and one of the culprits of the now infamous mortgage-backed securities credit scandal plaguing our country--which has nearly caused the absolute collapse of our entire financial system), who were on the verge of bankruptcy just one week ago. They are liars and cheaters and nearly missed being completely wiped out as a business due to malfeasance. They were only saved because Bank of America (one of our more sound banking institutions) came in and bought Merrill in the 11th hour--saving Merrill from humiliation and ruin--albeit the truth remains a fact. And the only reason B of A bought them is because it then gives B of A access to Merrill's vast client base of very wealthy investors--which is additive to B of A's business. They did not buy Merrill for being a sound, well-managed company. Quite the contrary. So you see, whatever Merrill Lynch has to say about anything, including Sirius XM's present or future, means nothing. How can anyone trust the word of a lying, nearly bankrupt company?
Goldman Sachs is another former investment banking firm that was also within weeks of probable bankruptcy due to over leveraging (same mortgage-backed securities scandal--though to be fair their exposure was less than other culprits). What Goldman did to save themselves from the graveyard, was apply for and was granted, changed status as now a regular bank, rather than an investment bank--subjecting them to less stringent rules of capitalization. They have also recently, just to raise more desperately needed capital to remain solvent, accepted a stock-diluting investment from financial titan Warren Buffett--guaranteeing Buffett a minimum 10% return (with zero downside) on his 5B investment into Goldman. But this is not the main reason why their opinion is worthless concerning Sirius XM. The reason is because Goldman Sachs is involved in the financing deal that Sirius Satellite Radio did to complete their leveraged merger with XM Satellite Radio (creating the new company now called, Sirius XM). In this deal, Goldman Sachs, to hedge (or protect) their financial investment in Sirius, were "given" newly created common shares to "short" or sell in the marketplace. As a result of this shorting action, they have been largely responsible for the stock price decline (because shorting causes the price to go down). From Goldman's standpoint, the lower SIRI's stock price goes, the more money they make. So you see, for their analyst to lower price expectations and create more doubt and concern about SIRI, so people will either sell their currently held shares or not be motivated to buy any new shares , all helps them make money--and a lot of it...probably in the 100's of millions when all is said and done. Their analyst will of course not include this in his report. So that is why I'm telling you--so you can be informed about the truth. I am not asking that you just take my word for any of this, but that you investigate the validity of my points (and those of other more impartial analysts), and information directly from the company, for yourself before making your decision about what Sirius XM is or is not as a company.
One of those other impartial opinions about SIRI you will find is also cited in these two referenced Seeking Alpha articles--that of Barclays (a solid, British-based banking institution who recently picked up parts of another mortgage-backed securities culprit, the bankrupt Lehman Brothers). Barclays, who has no agenda against SIRI, is more in line with what most other analysts covering Sirius XM think about the company and it's future. In closing, as you make up your mind about the company, I urge you to research other articles and reports written about Sirius XM, that are out there and available. I would also, for reasons I have cited, recommend that you disregard the opinions of the two un-credible analysts of Merrill Lynch and Goldman Sachs. The facts on those two just nearly-failed and implicated institutions, speak for themselves. In full disclosure, I am a long SIRI investor--not to mention a believer in the company's success. That being what it may however, has little to do with the undeniable and pure fact I have laid out in this post--and my main hope is this post might be helpful to others reading who may not know the whole story. Thank you.
Relmor,
Thanks for the sanity (and entertaining reads!). I thought we'd seen all the madness by now around here, but Tyler and Brandon have just gone to new lows. Wow...At first I didn't even post here because it wasn't worth the time to give to Brandon's article. Talk about insipid...sorry Brandon but huh? You really think the stock is a hold?? Appreiciate your advice (and the genius opinions of GS and ML!) Now we're giving credence and page space to the opinions of two failed investment banks who have an interest in seeing SIRI go down? And now we know Merrill most likely also has a short in on SIRI. Why else whould they chime in now? They're a FAILED INSTITUTION THAT ONLY STILL EXISTS BECAUSE BAC BAILED THEM OUT!!!
People posting on Seeking Alpha: have you been locked in a closet the past two weeks? You have nearly lost everything you own because of decisions MERRILL LYNCH, GOLDMAN SACHS, BEAR STEARNS, LEHMAN BROTHERS AND MORGAN STANLEY made--those were their OPINIONS TOO (LOL)!!!! And you trust the contents of this article? Wow. And worse, you have the stones to make disparaging comments about long investors??? WHERE IS YOUR CRED???? Further do you mean to tell me that you are credible talking about how SIRI's P/E multiple is too high at 10 or 20 when all these investment bank pukes were leveraged 40:1???? They were leveraging YOUR VERY LIVES TOO BTW...SIRI is just tryng to deliver a good service to its consumers. What are you thinking???
* The reason is because Goldman Sachs is involved in the financing deal that Sirius Satellite Radio did to complete their leveraged merger with XM Satellite Radio (creating the new company now called, Sirius XM). In this deal, Goldman Sachs, to hedge (or protect) their financial investment in Sirius, were "given" newly created common shares to "short" or sell in the marketplace.
I have asked this of Relmor also. If that info is out there then your evidence to your GS claim on this point is complete.
I've looked also for any filing regarding the shares and can not find it. Since I'm unfamiliar of what exact forms are filed in such a deal, I'm a little at a loss--and I'm not an accountant. But, one would assume that there would be some formal representation somwhere of the additional 1.5B shares of common connected to the deal--I don't see it. I only remember seeing it in the public profile one day after the fact.
When Mel was on Mad Money, he and Cramer talked about the deal--I watched the entire interview start to finish. As Cramer several times alluded to the deal details "he had right in his hand" during the interview, he brought up several of the negative issues surrounding the whole deal--naturally, since it was at that time Cramer changed his tune about the stock. This was also the first time I heard any specifics about how the deal was actually done--directly from Mel himself. As I have said, I never saw any forms released regarding the structure of the deal, esp. as it related to the additional shares of common (that were priced exactly @ 1.50--and which is why the morning of their introduction into the market 7/29/08, SIRI stock opened exactly @ 1.50, down from the previous days open of 2.29 and close of 1.88. Did you know why they opened exactly at 1.50 at the time? I didn't--I just thought people were jumping. The inside word was obviously out that the new shares would hit the next morning at the new price, and all those privy dumped on 7/28...You didn't though, because as the average investor, you had no details of what was happening). So Cramer said to Mel (paraphrase) "how can I recommend the stock when I know Goldman will be shorting the heck out of the common as a hedge." In that interview Mel explained the main points of the deal--he had to, to the public--hence the strategic interview in the first place. That is also why Mel said more than once how ugly the financing was he was "forced" into just to get the thing done before I think further scrutiny/injunction by NAB. (I'm still pissed btw that no specifics about the terms were released to the public in filings or reports--I can only assume that they knew if the public knew what was about to happen, the common would have been worthless that day, 7/29, there would have been so much selling). So anyway, of course Cramer, a former Goldman guy, had the details right there on a piece of paper. That's where it was revealed that Goldman received 133M shares of common stock to use to short at will as a hedge against default. That's my recollection anyway, though maybe getting a transcript of that segment would be the way to verify the number.
To be honest cos, I thought it was only GS until you brought up that the others (Morgan, UBS, et al) were also involved. All I can say at this point I am very positive that Cramer and Mel confirmed GS in that interview. A transcript would be the best way to verify.
One last point, which now also makes perfect sense as a piece to the puzzle. Remember back in that time, when SIRI longs were all pissed at Cramer because he changed up on the stock and went sell, sell, sell? As we have all watched the stock tank and have been averaging down the whole way? That's why Cramer said people should stay away from the common. Don't forget, he's an ex Goldman guy. He still hears what they are doing. Naturally he knows this type of deal and what happens on the short hedge with any parties anyway...but in this case because it was Goldman involved, he heard more about it from people he still knows in the company--he knew full well the stock was going below a buck and they were going to hammer the stock. So of course: sell, sell, sell. He didn't say hold, hold, hold, or think about selling. He URGED people to get the f out of the stock. That's what so enraged all the longs at that time--including me. But we didn't know what he knew. Of course he can't say he heard it from a little birdie, but he can just emphatically say stay away--which he did. But that's here nor there, cause here we are still taking blows and weathering the storm...it won't last forever and it won't be too much longer before SIRI starts shutting up some of these critics--not from maybe's, but real action from the company...but further proof of GS involvement comes now. Ask yourself these questions: Why are they the most negative on the stock by far (and have been for a while)? Why do they have the balls to set a .50 price target when most others are still around 2? If they don't have the most to gain through further price attrition vis a vis "the deal". That's my opinion and I'm sticking to it.
UBS and Morgan Stanley were lent the shares, 187 M used to facilitate the sale of the notes for the purpose of the note purchasers shorting them to hedge their investment.. The value set to the borrowers, UBS & MS was a 1.50 / sh (hence the drop in stock price) and the convertible share price at maturity of the notes is $1.87 / sh.
The second lot of 74 M shares will be sold from time to time on the market by the share borrowers for the purpose of shorting the stock also. There is an agreement that for all shares shorted on the market that the share borrowers would attempt to take an actual or virtual (call) position long equivalent to the shares shorted ( who knows how this is to be monitored). Nowhere to date has there been an accounting of the participation in this "Note" offering or news of who bought these converts. GS cannot be said to have bought notes and then shorted the stock on this offering until we see an accounting.
The other convertible that Cramer was confusing people with is the Feb, 09 convertibles that GS owns 40% of, $127 M worth with a convert price of around $4.47 / share. Mel did say that he has been contacted by the owners of these converts and told of their interest in refinancing them for a better deal. He said that was not in the interest of the company and that they would pay the Feb, 09 debt with a combination of cash on hand and Bank financing, not converts. I believe that this is what is pissing GS off and causing their negative outlook on the company, driving the price of the stock down.
If we can get an accounting of the July converts to close the deal, and GS was a big buyer of these bonds, then they would have also acquired shares from UBS and MS to short the stock. This is the piece of the Puzzle that is missing IMHO.
Thanks for the exact breakdown. I checked Edgar earlier but must have missed it. I wonder though, when it was released? Did you see it at the time of the deal? I suspect it was released after the actual deal happened. I will say, though unintentional by me, a little mis-information in SIRI's favor isn't a bad thing since they suffer from so much coming against them. And besides GS is evil anyway (lol). Though the players are slightly different than I mentioned, the concept SIRI faces is still the same in the form of a heavy short hedge. The goal as you know has been the same since the $1.50 value reset: drive the common price down as far as possible. As for evil GS, in this most recent analyst report, he conveniently moves the target and now suddenly focuses on the May '09 debt. What? Bogus! Obviously he realizes he has to give up the Feb '09 because it's now a nonissue--it's nothing to stand on anymore. AND he conjectures things like churn, etc... to his advantage in justifying a .50 price. These are clear cut attempts at mis-information against Sirius XM. The question I would pose is take a look at the analyst community having a price target or buy/sell rating on SIRI. Why is GS the ONLY one with such low targets (now along with evil Merrill)?? AND....that those low targets have come true? There are only two scenarios: 1. he's a genius (NOT, he's just proven in this latest report how much he really isn't) or 2. GS has an agenda and is more connected to those lent shares than people think. I'm going with 2.
Whomever has wound up with the shares, I guess we will wait to find out the extent of GS's interest besides their 40% deal. I won't be surprised to find out they are in deeper than they appear. Lastly, both GS and Merrill have lost total credibility just by their own bad decision making, over-leveraging, lying and greed. Not to mention that Merrill WAS BANKRUPT (only saved from the heap by BAC--talk about your 11th hour) long beore SIRI ever will be. Yet they have the GAUL to call SIRI stock underperform with a lowered price target based on inability to pay debt or secure credit. They suck. Their opinions can not be trusted period and should not ever be published (let alone put into headlines the way Tyler did). Their names are mud when it comes to investment opinion. IMHO...
Yeah, I can't remember where, but remember learning that the "average" investor couldn't get into those even if they wanted to. Maybe you even mentioned it a while back. Thanks...
The Explanation was also included in Sirius' 10-Q, filed on 8-11-2008, and can be found on p. 24 under Notes to Unaudited Consolidated Financial Statement: section, XM Indebtedness, paragraph titled: 7% Exchangeable Senior Subordinated Notes and paragraph titled: Share Lending Agreement.
As far as GS, I am convinced that the details of the 7% Note sale will reveal their investment is high, giving them a bunch of shares to play with, and the useless paper they own, represented by the 2-1/2% Feb, 09 converts, are all the reason that GS needs to short this stock.
The Feb, 09 converts are valued at $127M to GS and are fully paid for (final interest payment in Aug. 08). The convert price around $4.47 means GS won't convert so shorting is all there is left to do with new shares lent in the 7/31, 11th hour deal (speculation as already discussed). The Feb. 09 converts had hedged shares that will be covered and returned to the company (no dilution). Keeping the stock price down while trying to force the company to offer new converts in Feb is GS' only means to make a buck and hang tough.
I'll chime in on your price question...first for obvious reasons of having an agenda and for just plain being evil, I'm not giving GS any cred, so their .50 price means nothing to me. Nor Merrill, who is really a ghost because they were one day away from ruin and were only saved by a company that paid way too much for them and should have waited for failure, then come in at pennies and buy 'em up (ala Barclays with Lehman)...so Merrill = no cred either. I would have loved to see them fail.
Up until last week, I believed the bottom to be in @ .68--which was intraday. Otherwise, they've shown solid support in the .80's last few weeks. I want to see what happens tomorrow and Tues. I think if they hold here this week, in the face of these new bogus reports, I think the bottom is still valid.
One thing that worries me a little (just in that they could break the .68 level briefly, nothing major), is my looking back at the last time they went through this trying to "convince people otherwise" phase. They did for a brief time fall into the mid .40's, right before they started heading up for good. Of course this is a different time for the company and they have a much more established gig. But as said, I think this will be a good week to see what kind of strength the stock has at this level. If they are up the next day and two, I think short of a quick intraday swing down here or there, they have bottomed.
Here's a suggestion to think about. Right here at these levels, if I was intent on putting new money to work in SIRI, I would do the following. See what the next few days brings. If there's a hold, wait for an attractive intraday entry during a dive and use 50 or 65% of your cash there. Then keep the other 50 or 35% dry for a few weeks in case something happens to the downside...if not, just wait for the next pull-back for that second half. Trying to buy in at the EXACT bottom as you know is next impossible. Anywhere in here between .50 - .80 = the big picture bottom. Food for thought.
So as suspected, it was filed AFTER the new deal hit the street @ $1.50 on 7/29. The devil is ALWAYS in the details!...it's too bad that's the route SIRI had to go (the bad deal in general). But had it not, I most likely wouldn't have been hanging out here with you guys--which has been cool...
1. The article simply represents that some analysts have come out with opinions. When this happens, I cover it.
2. I try to outline the basics of what an analyst is saying without interjection of my own opinion. If I have a strong opinion about a report, I sometimes dig deeper into it in a separate article. I feel this allows readers to see an analysts opinion without my own opinion clouding the issue.
3. I feel it is important to see this, or any investment, from many perspectives without the rose colored, or gloomy gray glasses on.
Simply stated, articles such as this are merely to inform readers what opinions are out there. The fact that one analyst has more or less credibility than another is a matter of opinion. Even if i disagree with an analyst, or Jim Cramer for that matter, I still want to know what they are saying.
Cheers
If you should happen to read this and respectfully speaking...
First, I was pretty outraged yesterday by reading your and Brandon's articles as they both seemed to me be unfair to SIRI by putting the negative opinions of two non-credible institutions in headlines.
You say: >>The fact that one analyst has more or less credibility than another is a matter of opinion<<. But I think that should be examined.
Merrill Lynch is by all rights a failed institution. SIRI has not failed, but Merrill did (or were hours from it until BAC came riding in), yet they are given a headline of their opinion about SIRI's viability? As if they have the right to be opining at this point...I just don't get it. And Goldman, who is now just a 'regular bank' and no longer in the investment banking business (their quick escape from ruin), and who also is/was involved with SIRI financing, are they the right company to also get a headline? My answer to both is no.
From a journalistic perspective, I believe yes, you want to report the news, and it is fair to report both sides, but so is HOW it is all reported important. The way in which you constructed both your headline (negative news first) and the body (negative opinions first, positive at the very bottom), I think you would get few expert opinions that your article was not spun negatively--whether you intended to do it or not. On the issue of using credible sources, that may be as you say 'a matter of opinion'. But again, from a jounalistic perspective, do you really believe Merrill and Goldman (given their current status, improprieties, etc..) are credible to be opining on SIRI? What I see, is these are the only two overly negative opinions out there, so you felt compelled to use them regardless of their own internal failures. And what was worse, you basically made the article all about them (2 negative opinions to 1 'oh and by the way' positive in Barclays). If anything, and one HAD to put their (Goldman/Merrill) opinions in, they BOTH TOGETHER should have occupied the bottom third of the page (as an 'oh by the way') due to at least their lack of cred.
I'm just confused by your choices here Tyler. Why 2 neg views to 1 pos? If you're objective was fairness, why not 2 and 2? Why the neg spin on the headline and article itself through its construction? If you have time, I'd enjoy hearing your input.
We gave time that no one could afford to pay us as advocates for the merger-----doing research on the nefarious characters working to stop the merger.
Everyone here knows the 2 year story.
It is reprehensible and perhaps even criminal what Goldman and Wienkes did to this company.
Now they come out with recommendations to allow them to do what ever it is they will do with Sirius now a penny stock.
Pox on their houses.
There were three reports issued. Sometimes it is not possible to "balance" two bad with two good. It simply was a fact of timing.
Your opinion that putting the two negatives first could be countered by someone saying that the positive report first is getting buried by two negative reports.
The headline was simply a synopsis of what the reports were.
Today, CITI issued a report. There have not been others as yet. The headline is positive, and the analyst report is positive. Certainly that will have some people saying that I am "pumping" the stock when in fact I am simply reporting the release of another report. As yet, S.A. has not picked that article up, but it is on my site. If this afternoon a negative report comes out, I will report on that as well.
Thank you for your readership, and I hope you can understand why the articles are the way they are.
Thanks for the response. I caught your CITI article today--thanks for that. I only wish you would have been able to have all 4 in one article. But it is what it is. Peace...
you're bottom feeding now at these levels so who knows it could dance a little lower...keep a steady trigger finger!