By Antoine Gara
SiriusXM's (SIRI) stock has risen nearly 60% this year amid M&A speculation and quarterly earnings beats. Analysts covering the satellite radio giant expect gains may carry over into 2013.
On Tuesday, analyst Jessica Reif Cohen added SiriusXM to Bank of America's list of top stocks, highlighting the company's exposure to a recovering market for new and used cars, and expectations of up to $3 billion in share repurchases in the next year.
"From a fundamental perspective, SIRI is growing faster than any company in our media universe," writes Cohen in a note to clients. Bank of America gives SiriusXM a price target of $4 a share, up more than 40% from current levels.
The analyst projects SiriusXM's annual revenue, EBITDA and free cash flow growth will rise steadily in the coming years to reach 47% by 2016, as auto sales grow faster than expected and the company taps the used car market. By 2017, SiriusXM's satellite ratio service may be in 100 million cars, roughly double the present base.
Moreover, Cohen reckons SiriusXM may now have the right kind of leverage after debt burdens put it on the brink of bankruptcy in 2009. Specifically, SiriusXM may create earnings leverage for shareholders with the anticipated share repurchases.
Bank of America isn't alone in its optimism, despite the rally that has put SiriusXM at post-crisis highs above $2.80 a share. Evercore Partners analyst Bryan Kraft upgraded SiriusXM's price target to $3.20 a share from $2.80, citing improved projections for new subscribers. Kraft now expects SiriusXM will add between 1.8 million and 1.9 million subscribers through 2014.
"We continue to believe that a multi-year recovery in auto sales and an expanding total addressable market will fuel subscriber growth in the high-single digit [percent] range and lead to upside to investors' expectations," wrote Kraft in a Monday note to clients.
Optimism on SiriusXM comes amid a well-publicized dance between the company and its largest shareholder. John Malone's Liberty Media
) is close to taking a controlling stake in SiriusXM, expanding on a large minority investment made when the company almost went bankrupt
three years ago.
After Liberty Media raised its stake in SiriusXM to 49.5% in September, Chief Executive Greg Maffei indicated that Mel Karmazin might be replaced as head of SiriusXM once it takes full control of the company.
Meanwhile, Evercore's Kraft said the prospect of Liberty taking control of SiriusXM in the near term was remote -- and analysis indicates investors might do better to remain focused on the company's earnings trajectory.
Analysts deserve a pat on the back for sticking with
their fundamental expectations for the company. When SiriusXM shares fell below $2 earlier in 2012, they highlighted changes in the company's relationship with Liberty Media and a recovery in its earnings, balance sheet and cash flow as reasons to stick with the stock.
That optimism appeared vindicated after SiriusXM reported strong user, earnings and cash flow growth in its second-quarter results on Aug. 7 and Liberty Media raised its stake.
On Tuesday, SiriusXM touched a new 52-week high of $2.85 intraday. Three years after Liberty Media caught the market bottom with a 40% stake in SiriusXM, investors and analysts entered 2012 with the prospect that the easy money had already been made. The latest analysis indicates there's still reason to be optimistic.
Liberty Media gained its stake as a result of a $530 million loan to SiriusXM in 2009. A standstill agreement that prevented Liberty Media from increasing its stake for three years expired in early 2012. In March, a petition to the Federal Communications Commission paved the way for Liberty Media to move towards control of SiriusXM, which it has done with recent stock purchases.
SiriusXM's second-quarter earnings were highlighted by a 170,000 year-over-year increase in subscriber additions on the heels of a 16% rise in new vehicle sales, as well as used car service reactivations and lower churn, according to Kraft. The company's conversion rate held at 45%.
Prior to SiriusXM's share slump in June and July, David Joyce of Miller Tabak and Martin Pyykkonen of Wedge Partners cited conversion rates and used car subscriptions as unheralded catalysts
for SiriusXM's earnings, even in the absence of an acquisition.
Pyykkonen said in April that the used car market may double the company's satellite services in the next three to five years. With SiriusXM just beginning to leverage used car dealer networks to convert previously installed satellite chips into new subscribers the company may have a strong base of prospective subscribers even if new car sales don't maintain current growth rates. Meanwhile, General Motors
) and Ford
) show continued strong sales.
Analysts also highlight SiriusXM's growing cash flow. The company turned free-cash-flow positive
in 2011 after burning cash throughout the financial crisis, and recently raised monthly subscription prices for the first time in its history.
Meanwhile, cash-flow generation has been accelerating. Free cash flow reached $253 million in the second quarter, up more than 30% from 2011.
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