Despite delivering better than expected results last week, Sirius XM Radio
No matter how much it accomplishes -- from credit rating agency upgrades to generating gobs of free cash flow -- the boo-birds still find something new to chirp about.
One of the latest shots came in Friday's Wall Street Journal, where Heard on the Street's Martin Peers suggests that the stock is only worth $0.25.
Bulls are aghast. Shorts nod in approval. A quarter? It's a ridiculous notion, but investors should consider where Peers is coming from with his valuation, before dismissing it entirely.
The leveraged hand of enterprise value
There's no denying that a $0.25-price-tag on a stock that is trading four times higher is a slap in the face. But a casual investor who pulls up a quote on Sirius XM would be deceived by the market cap implied by a $0.25 a share valuation. Sirius XM closed out the year with a weighted average of 3.6 billion diluted shares outstanding, though last week's 10-K filing has the actual number of common shares outstanding as of Feb. 23 as nearly 3.9 billion.
The $0.25 price implies a market cap just shy of $1 billion -- an insanely low sticker for a company that just delivered pro forma revenue of $2.5 billion and $463 million in adjusted operating income last year (and fully expecting to improve on those sums this year).
We can't stop there, though. The 3.9 billion outstanding shares actually represent just 60% of the company. Liberty Capital
Now a $1.6 billion market cap with Liberty Capital is still insulting. It's less than what Google
Sirius XM closed out 2010 with just over $3 billion in long-term debt. There's a little cash on the balance sheet, but accounts payable outweigh the cash and accounts receivables. Either way, the net debt is rounded off to $3 billion. At the seemingly insulting $0.25-a-share point, Sirius XM would command an enterprise value of approximately $4.6 billion.
When the consistently profitable DirecTV
Peers leans on the company's adjusted EBITDA guidance of $550 million for 2010, suggesting that Sirius XM deserves a forward enterprise value-based multiple of 8, instead of 18, where it is now.
In other words, trading a single share for a quarter isn't as horrendous as it may initially sound -- until you realize why Peers is wrong.
Peers pressure
There are a few rudimentary things that are missing from the analysis.
For starters, Sirius XM's leverage also treats a low share price almost as a stock option. After all, Sirius XM's enterprise value to this year's adjusted operating income multiple can't dip below 6, because that would price the shares below zero.
Another thing missing from Peers' analysis is the value of the satellite-radio giant's net operating loss situation. Sirius XM lost $529 million last year, adding to its grand total accumulated deficit of $10.2 billion since its inception. The majority of that can be used to offset the tax liability on future profits.
In other words, it will be a long time before Sirius XM is paying material taxes on its future profits (and they're coming -- with its barely profitable fourth quarter a positive sign of things to come). Sirius XM's losses aren't pretty in the rearview mirror, but it represents billions in tax savings at today's corporate tax rates.
The final point that Peers is missing is that comparing satellite radio to satellite television -- or even cable broadcasters including Comcast
We don't know what Sirius XM's margins will look like when it really gets cooking. Unlike the television subscription services that have to pay escalating costs for content, there is no ESPN or MTV that is has to carry. Subscribers value satellite radio's deals with pro sporting leagues, Howard Stern, and cable heavies such as CNBC, but there is little stopping Sirius XM from controlling its programming costs by providing more proprietary content.
Premium radio will never come close to commanding the markups for premium television, but Sirius XM has far more wiggle room beyond the cost of maintaining its expensive satellites. Sirius XM offers a more open-ended future, and that is why the stock has skyrocketed over the past year -- and why it's not going to see $0.25 a share again.
Where do you think Sirius XM will be trading by the end of 2010? Extra value points will be scored if you can justify your valuation in the comments box below.
