By Demian Russian
With a new research report, Maxim Group Senior Media Analyst John Tinker weighs in ahead of Sirius XM Radio’s (NASDAQ:SIRI) Q1 earnings release on Tuesday, April 30th. Noting Sirius XM interim CEO Jim Meyer continues with growth initiatives, and the recently launched MySXM customizable Internet radio service, Tinker reiterates a BUY rating and a price target of $4.20 on the equity.
“Sirius XM Radio’s ability to lean in to new distribution forms its strength, as the company continues to look at new markets.”
– John Tinker, Senior Media Analyst, Maxim Group
Focusing on Sirius XM’s growing free cash flow, Tinker notes that that the company’s free cash flow per share grew from 6.4 cents in in 2011 to 10.7 cents in 2012, representing a 67% increase year-over-year. Tinker sees further growth, estimating 57% year-over-year growth to 16.8 cents per share for full-year 2013 — “post an aggressive share buyback of $2.64 billion or 800 million shares.” Sirius XM’s officially announced stock buyback program amounts to $2 billion. While Tinker does note that the company does have some debt covenants “which may prevent it from pursuing an aggressive share repurchase program,” he points to previous comments from both Liberty Media (NASDAQ:LMCA) Chairman John Malone and CEO Greg Maffei, which indicate that the covenants can be “worked around.” Tinker expects Sirius XM to lever up to 3X net debt/EBITDA, from net debt of $1.9 billion in 2012 to $3.57 billion in 2013, with the assumption that Sirius XM pursues an aggressive share buyback — subsequently increasing it from the previously announced $2 billion to $2.64 billion.
While Tinker sees Sirius XM investors continuing to speculate about Liberty Media pursuing a Reverse Morris Trust (RMT), he notes that Liberty management “continues to state that it is very comfortable with its SIRI investment and the strategy SIRI is pursuing in the near term.” Although, he does note that Liberty management has not ruled out the possibility of pursuing an RMT in the distant future. Tinker also explains that Liberty’s recent investment in Charter Communications Inc. (NASDAQ:CHTR), along with public comments indicating a continuing desire to further invest in U.S. cable television businesses, suggests that “Liberty needs Sirius XM’s free cash flow more than ever.” Tinker also argues that an RMT could be further delayed if Liberty were to use margin debt against its stake in SIRI.
While Tinker notes that the exploratory search committee, led by Liberty Media CEO Greg Maffei, has not yet officially announced it’s decision for a permanent Sirius XM CEO, he believes that interim CEO Jim Meyer “has been doing a solid job” thus far, and he sees the over a decade long stability in Sirius XM’s management team as a major advantage.
Looking to Q1 earnings, Tinker expects Sirius XM to report 491,173 net new subscriber additions, and report $913 million in revenues and $273 million in EBITDA.
Tinker’s 12-month target price of $4.20 is based on 15x his full-year 2014 free cash flow/per share estimate of $0.28 — post share buybacks.
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Disclosure: Long SIRI