I'm not the only one feeling chipper about Sirius XM Radio's (Nasdaq: SIRI) prospects these days.
Barrington Research analyst James Goss is reiterating his "outperform" rating on shares of the satellite radio giant, but raising his near-term price target from $1.25 to $1.50.
It may be just a quarter, but it's a chunky 20% lift. Sirius XM has clearly come a long way since it teetered on the brink of bankruptcy last year, with its stock trading as low as $0.05 a share.
Goss' optimism is essentially what we've been seeing for months. Retail subscriber erosion is being more than offset by automakers selling cars with factory-installed Sirius or XM receivers. Sirius XM has 1.1 million more subscribers -- now at 19.5 million -- than it had at this point a year ago.
Churn is decreasing. Conversion rates are high. Initiatives for used car lots to push subscriptions on cars with inactive receivers are a potential goldmine.
Can Sirius XM really be worth $1.50? The higher that Sirius XM's stock goes, the more it relies on valuation than speculative momentum to justify its price swings. Let's peek under the hood.
Goss feels that Sirius XM can be generating $1 billion in EBITDA by 2013. What does this mean for Sirius XM investors? Well, let's work the math. Now that Sirius XM is profitable, Liberty Capital's (Nasdaq: LCAPA) 40% preferred share stake in the company is working its way into the income statement. This is why diluted shares outstanding popped to 6.4 billion in Sirius XM's latest quarter.
The satellite radio star has a liberal history when it comes to printing new shares, but that pace should slow considerably now that Sirius XM is somewhat self-sustaining. Let's allow for stock options and other issuances and go with a round 7 billion diluted shares outstanding come 2013. There is also roughly $3 billion in long-term debt. In other words, at $1.50 we're looking at a market cap of $10.5 billion on 7 billion shares and $13.5 billion in enterprise value (if the debt level remains constant). Trading at an enterprise value to EBITDA multiple of 13-14 -- three years out -- isn't cheap, but it's not outrageous for what is now the only game in town when it comes to premium radio.
Satellite television giants DIRECTV (NYSE: DTV) and DISH (Nasdaq: DISH) fetch far lower multiples, but they toil away in a cutthroat -- and some would argue, fading -- market. Satellite radio remains a realm of growth.
In reality, it shouldn't surprise anyone if Sirius XM is trading for quite a bit more than $1.50 come 2013. It would mean a stiffer multiple, but Goss is setting the $1.50 price as a near-term mark. Few investors would be up to sticking around with a volatile stock for the sake of 30% in capital appreciation over five years.
However, for Sirius XM to truly claw its way out of pocket-change pricing -- without a reverse split -- it will also have to evolve. Whether it means reaching out to more listeners (and this could be domestically or abroad where its satellites don't reach, but streaming initiatives will) or simply milking more out of its subscribers (either through higher monthly rates, beefed up advertising, or new revenue streams), it has to happen to keep the party going.
Either way, a lot of analysts are warming up to satellite radio with valuation models to justify their enthusiasm.
You've come a long way, Sirius XM.
