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Lehman, JP Morgan Weigh in on Newly-Formed Sirius XM Radio

by: Tyler Savery August 06, 2008 | about stocks: SIRI    

Tyler Savery

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Lehman Brothers analyst James Ratcliffe issued a report Tuesday maintaining his overweight opinion on Sirius XM Radio (SIRI), but adjusting his price target to $2.10. The analyst sees some bullish aspects of satellite radio which derives a price target of $3.19, but also has caution in certain areas as the business of satellite radio moves forward as a merged company which yields a $1.19 target.

Ratcliffe is expecting Sirius XM Radio to move aggressively to generate synergies across its cost structure. The analyst sees the push-marketed business model of the OEM segment to be attractive, something I had covered in a previous article titled “OEM Has A Chance To Deliver $$$ To SDARS“. While I see the attractive nature of push marketing, there still needs to be consumer pull. At this point, with Take rates above 50%, it appears that the desire for satellite radio from consumers is strong enough that push marketing could take the concept over the top.

Ratcliffe noted that the merger process was a distraction, and that refinancing costs increased the interest burden, but views the transaction as worthwhile (near-term savings around $400MM+/year, $800MM long term).

The analyst maintained his rating, but brought down the price target to reflect a conservative stance on some aspects of the company going forward. Ratcliffe sees $460MM in 09E merger synergies, which is above the $400MM guidance issued by Sirius XM. However, he notes that the EBITDA and pre-satellite capex FCF are below company issued guidance ($250MM and $(36)MM loss vs. $300MM and positive guidance, respectively).

Lehman ran a bull case and bear case scenario on their valuation, based on varying the terminal conversion rate, SAC for used car reactivation, timing and success of GM (GM) contract renegotiation, overall SAC, and the rate paid on 2009 debt refinancing. Lehman’s bull case valuation yields a $3.19 YE 2008E fair value (50% above our base case) while our bear case yields a $1.19 fair value (44% below our base case).

Other points by Ratcliffe include:

  • OEM will be the driver for subscriber growth.
  • Retail will be a small contributor.
  • FCC concessions unlikely to have a negative impact on the company.
  • Credit markets in 2009 may be slightly better, but company should have a cost cutting track record and should be able to obtain the financing needed.

JP Morgan has returned to the satellite radio analysis arena with a cautious neutral rating. The firm, which was involved in the merger process, believes the post-merger company Sirius XM Radio will survive and have new flexibility to scale its expenses and capital structure to the market opportunity.

On the cautious side, however, JP Morgan feels that Sirius XM Radio “faces a trifecta of macro, valuation, and capital structure concerns that are likely to weigh on the shares near term, making us more cautious than when we last covered the pre-merger companies 1.5 yrs ago, rating them both OW.”

They feel that post merger there is a better company, and they see the synergy story in a value similar to that set forth in guidance by Mel Karmazin. JP Morgan sees the guidance for $400m of merger synergies in 2009 as attainable, and further points out that synergies growing in subsequent years is a reasonable assumption. JP also sees positive free cash flow in 2009 and beyond.

On the caution side, the debt picture of Sirius XM Radio raises a bit of concern according to the analyst. Sirius XM has $1.085b of debt coming due in 2009. The common assumption is that Sirius XM will be able to refinance as the business should be stronger and credit markets hopefully no worse than recent days when Sirius XM refinanced $1.25b of debt for the merger. Thus, better financing terms are tied directly to the company performing better, as well as the condition of the credit market. Given Mel Karmazin’s history of obtaining his goals, the real concern will be the credit markets, which most assume will not be worse when the financing becomes a short term issue.

Noting the condition of the economy, JP Morgan sees satellite radio as discretionary, which could present some harder than anticipated times for Sirius XM. However, even in a harder economy, satellite radio seems to be holding the line on costs, while improving take rate and churn. Over the next couple of years, JP Morgan sees overall installations in the OEM channel ramping up to 64% by 2010 in contrast to about 35% in 2007.

The reason for caution? JP Morgan sees valuation as challenging. At a price of $1.46, just over 3 billion shares, a market cap of $4.4b, and a net debt at $3.0b, they estimate the firm's value at $7.4b, 20.4x our 2009e adj. EBITDA, which they note is slightly above guidance. JP Morgan's analysis of subscriber economics suggests that the current enterprise value discounts the current sub base, but not growth beyond that.

Position - Long SIRI

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This article has 78 comments:

  •  
    Aug 06 07:55 AM
    Another excellent article Tyler. Your comments are always realistic and encouragement to holders of Sirius/XM. Stockholders don't deserve all this bad mouthing and comments concerning the stock's potential.
    Reply
  •  
    Aug 06 08:29 AM
    Ameritrade will not allow trading on Siri this morning and has no answer on why I can trade. Can anyone help me on this issue.
    Reply
  •  
    Aug 06 08:34 AM
    I'm with Edster.

    If I were niave I'd be thinking how odd and dumb it would be that supposed shareholders would be blogging trash about something they own and would hope would appreciate. I think the real world is that there are droves of short selling cowards posing to be long investors in these forums who are constantly hammering SIRI to make a quick buck regardless of the merit of their case. How can we petition the SEC to ban naked short selling on SIRI who is obviously under attack by the vultures? I'd also be very leery of the motivations of the supposed analysts who keep trying to sink things as I'm sure the NAB didn't just go away when the FCC vote was cast, the real war is on as SIRI is now a direct threat and they can't do anything positive about it because of their business model.
    Reply
  •  
    Aug 06 08:39 AM
    Over the past year companies that accomplished a significant refinancing have been made to pay dearly in this credit environment. If the money is there it will certainly be at increased rates, if not, then the equity dilution will be substantial. Since equity is sorely needed it may be the best way to go.
    Reply
  •  
    Aug 06 09:00 AM
    They never include the used car segment in their numbers. Those numbers are growing rapidly.
    Reply
  •  
    Aug 06 10:07 AM
    Scottrade is not accepting sell orders for SIRI. As if!

    I called my local branch office, and I was told the reason is that the merger and name change is going through today.
    Reply
  •  
    Aug 06 10:18 AM
    Can someone tell me why that as soon as the merger goes through

    7/28/08

    Shaw Jack Allen
    Award of Options 184,000 shares at 0.00

    Parsons Gary M
    Award of Options 3,203,583 shares at 0.00

    Zients Jeffrey D
    Award of Options 1,242,000 shares at 0.00

    The company is going broke and just gives away 4.5 mil shares to executives. I understand that 4.5 mil shares are only .9% of the shares available, but you would think with already making at least (and I am being conservative) 1/2 mil in salary, they could afford to buy their own shares to help the company.
    Reply
  •  
    Aug 06 11:38 AM
    TYLER YOU USED TO POST CITI ANALYSTS $9 TARGET ON SIRIUS, NOW YOURE GIVING US A 2.19 TARGET BY SOME OTHER ANALYST.BOTTOM LINE IS YOUVE BEEN DEAD, DEAD WRONG TO THE TUNE OF OVER -80% DROP
    Reply
  •  
    Aug 06 12:01 PM
    veryserious... I sure get tired of you blaming everyone else. What babies.
    Reply
  •  
    Aug 06 12:03 PM
    Tyler.... Thanks again for your up to date coverage. Let's see what Mel has to say on thurs.
    Reply
  •  
    Aug 06 12:10 PM
    User 232143 -- It's probably change-of-control severance provisions in their employment contracts and/or option awards. If you go to sec.gov's EDGAR serach (or your favorite EDGAR retrieval site) and read the XMSR proxy statements (DEF 14As, usually) then look for the compensation sections, it will outline how/why these people are paid.

    Here is the link to the most recent XMSR proxy: sec.gov/Archives/edgar...

    You'll probably have to do more digging if you want to know details; their various agreements will be exhibits to certain SEC filings.
    Reply
  •  
    Aug 06 12:54 PM
    veryserious......you and your ilk are only representative of the whiners and blamers of others, for your lack of homework and actions. Like having to put up with someone's whining brats ... reasonable grownup people simply get tired of the squalling, and tirades. Any and all brats should leave the grownups, and go to their rooms.
    Reply
  •  
    Aug 06 01:10 PM
    The majority of stockholder that are ok with the current state of the stock won't comment. The extremes are usually what gets noticed. The purchase of stocks is a committment. Going all-in on one stock is poker not investing. Using Information to purchase stocks is the same. The space and time available to any author is limited. There are tools out there to help find other articles (Google, Yahoo). SO...............venti... because YOU made a decision to purchase something YOU now regret is YOUR fault. There are plenty of investment clubs, and yes, even your bank offers investment advise. Do your homework, clean your room, take out the garbage, & mow the law kiddos.

    It seems the only sure things in life
    are
    .......Death
    .............TAXES
    .....................A... YOUR CONSTANT WHINING!!!!!!!!!!!!!!

    Grab a green tea and chill!!
    Reply
  •  
    Aug 06 01:17 PM
    verySERIOUS, What are you an idiot. If all you have seen are those then you must not read much. If you go to Sirius Buzz, you will see Tyler covers many analyst with many different opinions. Not to mention there are other places to go to get them besides Seeking Alpha and Sirius Buzz.
    Reply
  •  
    Aug 06 01:21 PM
    verySERIOUS- My last comment was all for you!!!
    Reply
  •  
    Aug 06 01:43 PM
    verySerious and other whiners do you really mean Whaaa I bet on a short term gain from the merger, whaaa I don't know a stock from a bet,..whaaaa I want everyone to hear me whaaaa, I hate it when people post factual content...whaaaa I think I can't get people to read my post without all CAPS..whaaaa I'm really a scumbag trying to tank the stock for my short positions, whaaaaaaaa...I'm an NAB hired anonymous Internet message board goon, not much different from a short seller...and terrestrial radio is dying...whaaaaaaaaaaa....

    BTW I'm in for 10,000@3.1 and am looking forward to watching the FCC and CCU have their censoring, fascist faces rubbed in it over the coming years. Also, for those unaccustomed to seeing details of executive offerings I suggest you look at the $12m cash retention bonuses that Lucent have to executives as their stock went from $80 - $1 in 2002, never mind the games being played with options. It is nothing new and absolutely not the fault of SIRI that the market allows all companies to get away with it. Where are all the whiners on the rest of the executives getting comps????
    Reply
  •  
    Aug 06 02:04 PM
    Look if you buy a stock it's your decision and your decision alone.
    Blaming others that provide free information regarding a stock is stupid.
    Give the company a chance to try and pull itself out of this mess.
    What did you think the companies merging was immediately going to send the stock soaring. If that is the case then you shouldn't be buying stocks on your own. Look at all the articals that have been trashing SatRad!!! You didn't see any of those. Be accountable for your actions and stop blaming others.
    I Just bought another 6000 shares. If I lose, then I have no one to blame but myself.
    Reply
  •  
    Aug 06 02:19 PM
    FREE INFORMATION REGARDING A STOCK??!!!? WHAT GOOD HAS THI S'FREE INFORMATION' DONE US?!?

    [This comment has been edited to remove abusive language. -SA editors]
    Reply
  •  
    Aug 06 02:20 PM
    I dont know what you people are talking about but...I'm buying the stock. It may be a crap shoot, but all i see is talk about models, and debt and blah blah stockbroker talk. What about the technology, what about the services offered and programming? Are these not marketable items? Is there no hope in satellite radio? I don't think so. But hey, what do I know.
    Reply
  •  
    Aug 06 02:45 PM
    Hmmm . . . does anybody remember when ya first heard that Evil Knievel was gonna jump the Snake River Canyon?

    When it came time for the big jump I seem to remember people saying . . . hey! what's this!? Where's the motorcyle? Who said anything about a rocketship with a parachute? (expletives deleted of course).

    I guess it's all in the details, huh? . . . so, when Sirius XM reports earnings tomorrow will investors (a.k.a. "Unsecured Creditors") get the same old tired scripted speech about $400mm synergies, 20mm subscribers, free cashflow 09 or will there be constructive guidance in well articulated, unambiguous, detail? Not the usual cough-cough and hand-over-mouth, "um-uh, then there's this little satellite we have to launch in 09 but that's just a capital expenditure . ."

    I ask you . . . will Uncle Mel be delivering the earnings report from a motorcyle or a rocketship? . . .hmmmm
    Reply
  •  
    Aug 06 02:50 PM
    probably a rocket ship................th... same one hes going to launch the satellite with.
    Reply
  •  
    Aug 06 02:50 PM
    When YOU invest in a stock YOU must read all articals.
    YOU MUST Analyze company numbers, Management Background, Future Projections. This is your homework.
    There have been many Pros and cons regarding this stock.
    It your responsibility to verify the facts of information being given.
    Many writers have said SELL SELL SELL. and gave plenty of reasons why.
    All of us are happy to read that there is light at the end of the tunnel but it should not be noted as the reason that one holds onto a stock. Do your homework



    Reply
  •  
    Aug 06 03:04 PM
    Frankly , I just see Tyler parrot what I just read the day before , and obviously what he just read the day before ....this article , case in point ....basically just passing on info from another analyst .....I am not knocking that , just saying don't really see anything new or original ......but hell I sure don't have anything to offer !!!!!! hahahah .......here is my expert opinion .....if EPS goes up , the stock will too .....there ya have it , in a nutshell ......or a nutsack , take your pick ........EPS is the elephant in the room now ....Siri lives or dies on that .....no profit ??? no siri ....profit ??? siri sprouts wings .........we have a year or so to fly or die ......the bottom line , is now , the bottom line ........everything else is smoke and mirrors .......I don't care if you have 40 billion subscribers .....unless you earn a nickel , it don't mean squat
    Reply
  •  
    Aug 06 03:11 PM
    UHuh-
    Your comment on the Tech is dead on...The end of subsidized radios will be at hand. Then the numbers will show a marked difference on the P/L statement. This company is not an Enron.. The subsidized radio numbers, the launching costs of satellites, and the Debt costs are items that are going to go down or dissappear. The Subscriber numbers do have a ceiling, but not for a while. As of 2006 there were 250 Million vehicles on the road (www.bts.gov/publicatio...). Currently the subscription count is at 19 Million. That is less than 1/10th the Vehicle population. Taking the entertainment factor into account. US homes account for 58.4% subscription services in all american homes in 2006 (en.wikipedia.org/wiki/...). A conservative approach of half of that percentage for autos would be 29.2%. So, a growth to 75 million, is not out of the question. I can continue to crunch the numbers for others on the forum... but that would be insulting their intelligence. Suffice to say .... I'm next to you on the short bus!!!
    Reply
  •  
    Aug 06 03:38 PM
    UHuh! Do you know what fiundamentally drives a stock price? Cash profits. All the flashy lights and technology are wonderful and exciting, but if the company can't make a dime (as both satrad companies have not) the stock will inevitably languish. Are you sure this is the best possible investment opportunity out there given the level of risk you're assuming by owning the shares of this money-losing company?
    Reply
  •  
    Aug 06 03:54 PM
    I am willing to take the risk banking on the flashy lights and technology. This is what will generate the cash profits you speak of. If these things didnt exisits it wouldnt be much of a investment would it. im basing my judment to invest on what i feel is marketable to the consumer. If im wrong....well ill just tell my self...."self, its not you, the rest of the world is retarded." and then ill buy something else.
    Reply
  •  
    Aug 06 04:03 PM
    Crunching numbers for these emotional, brainless whiners on a continuous basis....... is a waste of valuable time. Cos1000, and 163888,and Tyler, are the sharpest pencils in the box, when it comes to crunching numbers, insight and details on this entire siri situation. They've been studying and buying and trading the stock long before most on this post even knew of the merger process. Not only can they "parrot back" the info...........they understand it. I''d like to repeat part of that sentence. "THEY UNDERSTAND IT". You would be well served to follow their advice, however, they should not be required to repeat paragraphs, simply because the whiners want them to support each and every statement......... time and time and again. I'm sure they have much more important things to do...................a... I for one, value, and thank them for the great amount of thankless time and light they have provided, and continue to provide throughout this dark and threatening process. For my friends.............ci... all around. Thanks again.
    Reply
  •  
    Aug 06 04:05 PM
    MGN: SIRI going through a CUSIP and name change that will be effective tomorrow.
    Reply
  •  
    Aug 06 04:06 PM
    The above last line or two should read ..........For my friends..............c... all around. Thanks again.
    Reply
  •  
    Aug 06 04:10 PM
    Since the screen won't accept the word cigars, I'll substitute the word stogies.
    Reply
  •  
    Aug 06 04:12 PM
    vicar you are honest, erudite and true to form when calling 'what you see' mantra..vicar thank you for the healthy dose of skepticism you expressed throughout

    [This comment has been edited for abusive language and the user banned from posting. - SA Editors]
    Reply
  •  
    Aug 06 04:14 PM
    $2.10 target?!?!?!?!!? the sheer audacity when you starting writing and raving about sirius north of $4!!!!!!!!!!!!! sheer decency tyler prevents me from saying what i REALLY think of YOU!!!!!!!!!!!!!!!!
    Reply
  •  
    Aug 06 04:16 PM
    Opinions from both ends of the spectrum and everything in between is the best way to be informed and make your own decisions. Otherwise we get caught up in "groupthink"... With all the fingerpointing and bashing going on, I value anything intelligent anyone has to say on this thread and many others. Tyler, Cos1000, 163888, Vicar, etc. - you all have valid points and have illuminated this industry and stock from all sorts of different angles that I never would have thought of myself. Thanks to all.
    Reply
  •  
    Aug 06 04:19 PM
    all these big words flying around. Can we dumb it down a bit?
    Reply
  •  
    Aug 06 04:27 PM
    I was hoping for additional large share purchases by insiders (Directors, Howard, Oprah, etc.) Would have been perfect today, just before earnings. Or maybe they're waiting for Friday and next week. They should try and time it so that each day, someone new ponies up personal money to buy shares in a show of confidence.

    Anyone think MK is planning on turning the "synergies" win, into a triple win? By that I mean:

    1) $400M = WIN (everyone knows and expects this)
    2) $400M+ = WIN (boost synergy numbers during conference call)
    3) $400M++ = WIN (actual results next year)
    Reply
  •  
    Aug 06 04:33 PM
    Someone should deffinetly step up to the plate soon. I am sure no one will make a move until Mel gives the order.
    Reply
  •  
    Aug 06 04:36 PM
    Q, please dont put me in a list with VicDave. You insult me when you do that. VicDave has never added anything to this board except his venomous pessimism. What you did there is like you thanking the paramedics, doctors, and the rattle snake that had bittin you.
    Reply
  •  
    Aug 06 04:37 PM
    So, thoughts? Will the stock go up or down tomorrow based on the earnings expectations for Thu afternoon? (Crystal ball anyone)???
    Reply
  •  
    Aug 06 04:42 PM
    ASK AGAIN LATER....LIKE TOMORROW.

    Seriously though, I say not much change in either direction. I think people are just going to sit and stare like bewildered dogs watching a beam of light on a wall.
    Reply
  •  
    Aug 06 04:44 PM
    well here's an idea , possible cost cutter , and generate capital .....offer a one year subscription .....reciever & one year subscription 200 bucks ( apprx ) .....especially since Washington is considering another 300 dollar retard stimulus check soon ......siri gets a years worth of cash up front , and saves 11 billing cycles worth of labor .........$300 = siri for a year and a night on the town ........I also think people would rather just flop 200 bucks and not hassle with a monthly statement ....do it online in 5 minutes ....and after you already have the reciever , then it would be like $150 for a year ........get people out of this monthly mindset , and into an annual subscription ........might could even drop it to 100 bucks a year ......pocket change
    Reply
  •  
    Aug 06 04:44 PM
    163888 - my intention was not to insult, but to take a step back and gain some perspective. Everyone's is entitled to their opinion - without both sides of the same coin to balance each other out, you'd just be hearing more and more of the same positive stuff, with nothing negative to keep it in check. As much as i want to score big on SIRI like everyone else, it makes me wonder how most of us got hammered by this stock.

    My take on it is that we were victims of groupthink. Voices of dissent and different opinions were frowned upon and accused of being misleading and deceptive shorts. The bottom line is: they were right in the short-term, whether or not they engineered the outcome. Long-term, I think we win the war.
    Reply