By Demian Russian
With a recently issued research report, Maxim Group Senior Media Analyst John Tinker reiterated his BUY rating and raised his price target on Sirius XM Radio (NASDAQ:SIRI) from $3.35 to $3.80.
While Tinker was previously expecting a strong stock buyback with Sirius XM CEO Mel Karmazin of 1.65 Billion shares (~25% of shares outstanding) by year-end 2014, he now sees Liberty Media (NASDAQ:LMCA), who is expected to take control of Sirius XM (pending FCC permission), as being more aggressive. He is now assuming that Liberty may leverage up the company to 4.0x net debt to EBITDA and buy back 2.22 Billion shares (~34% of shares outstanding) by year-end 2014.
Tinker notes the benefit to the company in increasing its leverage in regards to the utilization of its NOLs (Net Operating Losses). While Sirius XM has approximately $7.8 Billion in NOLs, the company is expected to begin to utilize those rapidly with its pre-tax profits heading into 2013. “Higher interest expense due to increased leverage should help reduce pre-tax earnings,” Tinker explains.
Tinker says that “another positive is that discussion about a Reverse Morris Trust (RMT) appears to be on the back burner,” citing recent comments to that effect made by Liberty Media CEO Greg Maffei. He also notes Maffei’s public statements indicating that he believes Sirius XM’s growth prospects over the next three years are “excellent.”
Under the assumption of Liberty Media taking a more aggressive stance in regards to leverage and stock buybacks, Tinker lays out some scenarios where he sees SIRI being valued at between $5.55-$5.73 per share, based on his full-year 2013 and 2014 estimates, post stock buybacks through 2014. Assuming a 4.0x net debt/EBITDA ratio for full-year 2013 and full-year 2014, he estimates that Sirius XM could potentially buy back ~$6.6 Billion or ~2.22 Billion shares (~34% of shares outstanding) over the next couple of years at an average share price of $3.00 per share. However, Tinker does note that there are debt covenants on Sirius XM’s 8.75% Senior Notes due 2015 and 7.625% Senior Notes due 2018 which limit the amount of stock the company is allowed to buy back.
While reiterating his EBITDA growth estimates for 2012 (27%/$928 Million), 2013 (26%/$1,170 Million), and 2014 (24%/$1,453 Million), he raises his FCF (Free Cash Flow) per share growth rate expectations for 2012 (76.9%/$0.113), 2013 (70.2%/$0.193), and 2014 (48.9%/$0.287).
Tinker is basing his new $3.80 price target on 20x his full-year 2013 FCF per share estimate of ~$0.193.
Maxim Group Senior Media Analyst John Tinker will be the special guest on Playground Radio for an exclusive, live interview on Thursday, October 18th at 8:00 pm ET.
Disclosure: Long SIRI
Contact the author: DemianRussian@SatelliteRadioPlayground.com