Inside Wall Street: Sirius XM volume on high

With subscribers rising to 25 million, analysts' targets for stock keep ratcheting higher.

By Gene Marcial Aug 8, 2013 12:58PM

Credit: 2012 Sirius XM Radio IncCaption: XM Onyx with Home KitIt's remarkable how Sirius XM Radio (SIRI) has changed, if not revolutionized, radio forever. It has provided its 25 million subscribers several out-of-the-ordinary and industry-rejuvenating services that radio listeners haven't had before.

That includes providing your own choice of radio channels through an unusually convenient interactive service unheard of in radio broadcasting.

No wonder Sirius has attracted others that want to pursue radio's evolution, including the increasingly popular Pandora (P), which seeks to provide many of what Sirius already offers. But Pandora is another story, which this column may visit one of these days.

Sirius, which merged with satellite radio peer XM in 2008 and changed its name to Sirius XM Radio, offers digital quality audio programming channels, including 100% commercial-free music as well as an array of premier sports, talk, news reports, entertainment, traffic, weather and children's content. Subscribers can use car-based, home or portable devices to receive content for a monthly fee.

One interesting feature that subscribers love about Sirius XM's service is that it's portable: You can hear it in your car, smartphone, iPad and even on your PC and laptop. But all these conveniences are already adequately known to Sirius subscribers. What's important for investors to know is how attractive the company has become as an investment vehicle.

"The company is well positioned to continue delivering meaningful growth as it capitalizes on steadily improving domestic auto sales, while also focusing on enhancing its offering and returning capital to shareholders," says Tim Hamby, analyst at Janco Partners. He recommends shares of Sirius as a "strong buy."

The company, he adds, has repeatedly proved its ability to deliver strong subscriber growth, leading to consistent gains in revenues, EBITDA (earnings before interest, taxes, depreciation and amortization), and free cash flow. Strong financial performance aside, says Hamby, "we are also encouraged that the company has committed itself to returning capital to shareholders while focusing on innovation."

Sirius posted solid second quarter results, notes Hamby, reporting "record setting marks for multiple subscriber and financial metrics." So he has raised his price target for Sirius' stock, currently trading at $3.78 a share, to $4.50.

He says the strong second-quarter results has placed Sirius on track to exceed its fiscal year guidance of 1.6 million net subscriber additions, $3.7 billion of revenues, $1.14 million of adjusted EBITDA and $915 million in free cash flow.

The type of operations at Sirius is also seriously enticing. "Sirius' high incremental contribution margin, favorable capital allocation policies and emerging opportunities in telematics are highly compelling," says David Bank, analyst at RBC Capital Markets.

So far this year, Sirius has been performing above expectations. "We think Sirius' results for the first half of 2013 showed remarkable operating strides that build on the prior year's momentum," says Tuna Amobi, analyst at S&P Capital IQ, who rates the stock a "buy."

He sees the company benefiting further from a continued rebound in new vehicle sales. "But We also see some early traction in the nascent used-car channel," he adds.

Meanwhile, Amobi says he sees Liberty Media's (LMCA) minority stake and involvement in the company as possibly engendering further rethinking on capital allocation. In December, Sirius paid a special dividend and launched an initial $2 billion share buyback plan.

Amobi says that even after a new debt offering of $600 million, "we still expect an acceleration in free cash flow in the years ahead." Reflecting the recent auto sales momentum, Amobi has raised his 2013 sales target to $15.6 million from 15.4 million, and his 2014 forecast to $16 million from $15.9 million.

With the growth of subscribers riding high in part based on the continued solid rebound in U.S. auto sales, the revised improved targets the company has set in growth "could yet prove conservative," argues the S&P analyst.

Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

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