Bank of America Merrill Lynch has initiated the satellite radio giant with a Buy rating and issued a price target of $3.75. What makes this call so interesting is that despite the Liberty Media Corp. (NASDAQ: LMCA) effort to seize control, Bank of America’s team, led by Jessica Reif Cohen, is looking for close to 50% upside in the call. The prior street-high analyst target is $3.35, and the consensus price target without the effects of this call was $2.80 per share. Here are four issues driving the value:
(1) Average projected EBITDA and FCF growth through 2016E are compelling, averaging 20% and 35% respectively (the fastest growth rate of any media company).
(2) Liberty Media may eventually take control of Sirius, the greatest likelihood of a mechanism for doing so may be an RMT.
(3) Satellite Radio’s operating leverage is difficult to match in media.
(4) Expected free cash flow generation will be returned to shareholders in concert with a healthy leverage ratio of 3-4x, which, even at the low end of the range, could be more than 40% accretive to long-term FCF/sh.
Of concern is whether Liberty’s actions will result in long-time CEO Mel Karmazin exiting the company. Bank of America now projects that Sirius can grow from its current 23 million subscriber base to 30 million by the end of 2016.
The upgrade report said:
SiriusXM is a business with scale enjoying accelerating growth due to a revived auto market. Although near-term concerns involve Liberty’s intentions re its 50% stake in SIRI, we anticipate focus to be on buybacks and a tax-effective spinout to shareholders. The biggest unknown is whether CEO Mel Karmazin would stay on as CEO under new ownership. SIRI represents a compelling value with upside. We initiate coverage with a Buy rating and $3.75 PO.
While not really a part of today’s research, Bank of America also has a Buy rating and $17 target on rival Pandora Media Inc. (NYSE: P).
SIRIUS XM Radio shares are indicated up more than 2% at $2.63.
JON C. OGG
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