Fundamental analysis of Sirus XM (part 3)
Value, Special Situations, Long-Term Horizon, Contrarian
Contributor Since 2010
Fundamental Finance aficionado.
Special interest in marketplace companies, exchanges and other "croupiers".
Focus on software and travel industry.
See part 2
This article is the final part of my analysis of Sirius XM. In the previous valuation, certain assumptions were made to determine a cap the potential Sirius XM model by determining the state of maturity of its current business platform. Additionally, the assigned probabilities applied to each scenario were nothing more that reasonable estimates and there most likely subject to bias. This article will provide a simple Monte Carlo analysis to evaluate the distribution of possible outcomes, given the parameters that were discussed in the previous parts of this article (see part 1 and part 2), with the addition of maintenance capital expenditures.
The parameter range was supposed to reflect the growth potentials in subscriptions and revenue per user (ARPU) as well as the negative effects of a more hostile competitive environment. Overhead and variable costs per estimated by reformulating the income statements of the last three years (see part 2). From the cash flow statements it can be seen that maintenance investments are generally into property and equipment (see table below).
However these figures are not likely to represent future expenditures as Mel Karmazin states in his most recent letter to shareholders: “We expect our satellite capital expenditures to decline by nearly $90 million in 2011, and by another $100 million in 2012 to nearly zero.” So a conservative estimate of capex in the model will be a range of $10-$100m per year or 1-10% of annual overhead.
Figure 1: Input Variables
5000 iterations were performed on the following calculation:
Subscriptions * ARPU * (1 – Var) – (C * H) – H = Owner Earnings
The results
The mean result of the simulation was around $2.2 billion in owner earnings. The minimum was $820 million and the maximum was around $4.5 billion. The distribution of outcomes is fairly asymmetrical.
Figure 2: Simulation Results
A notable result is that no iteration produces a negative result (the lowest possible outcome is $790 million). Another notable aspect is that the maximum outcome is that even the median outcome of owner earnings is considerably higher than the maturity state outcome (the cap) of the scenario analysis in part 2. The explanation is that in the scenario analysis EBITDA margin of 40% was a constraint to revenue growth. In the Monte Carlo analysis however, the same parameters are used, but the maximum in subscribers as well as ARPU are without constraint and can occur at the same time, hence the higher earnings.
Valuation
By plugging an estimated EBITDA (owner earnings plus maintenance capital) of $2.3 billion, we arrive at a per share valuation of $3.52. This is considerably higher than in the previous valuation model, which is to be expected as this approach carries fewer constraints on earnings potential.
Conclusion
The scalable nature of the Sirius XM’s business model and high financial leverage is reflected in the wide range in per share value estimate. Based on both valuation approaches, reasonable estimates of per share values are in a range of $1.54-$3.52.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.