Loading...
Symbols:
Authors:

CITI: $8 Target on Sirius

by: Tyler Savery April 25, 2008 | about stocks: SIRI    

Tyler Savery

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

Citi analyst Tony Wible assumed coverage of satellite radio, and has opened up with an $8 price target on Sirius Satellite Radio (SIRI). The detailed report deals with the companies as a stand alone as well as with a merger. Wible sees a 70% chance of FCC approval on the merger.

The report is somewhat curious in the price targets for XM (XMSR). News wires are picking this up as an XM downgrade, when in fact, the assumption of the merger passing would have a much higher target for XM given the conversion ratio of 4.6 shares of Sirius for each share of XM.

Fresh and Simple Reasons for Success

Assuming Coverage of the Satellite Radio Industry

  • Staying Strong – Satellite radio should continue to change the audio entertainment industry and gain share as its proves to be fresh (no need to create play lists or buy MP3s), original, cost effective, and a simple way to access premium/long tail content that can not be supported via radio or MP3 models. Given the highly fixed cost base of the companies, we view the sub growth as the key driver of the stocks and we see the industry having up to 55 mil subs by 2011 (+33.3% CAGR).
  • Economy Hurts Near-Term Results — Our standalone estimates are generally below consensus reflecting economic weakness and lower auto production. The fixed cost leverage compounds top line weakness; however this should be more than offset by substantial merger benefits and increasing OEM penetration rates.
  • 70% Merger Probability — We believe that the proposed merger between SIRI and XMSR will drive significant costs savings (we forecast $500 mil by 2010 or 13% of the expense base) and potential revenue synergies of another $400 mil.
  • Alternative Valuation Study — While we value SIRI and XMSR using a DCF we also looked at terminal cash flow per sub and EV per sub, which shows SIRI and XMSR could be valued in a best case up to $8 and $30 (or $10 for the combined company).
  • Buy SIRI; Hold XMSR — We rate SIRI Buy (1S) with an $8 target based on: 1) a 70% probability the deal closes and a $10.00 target and 2) a $2.25 stand-alone value. We rate XMSR Hold (2S) with a $12.25 target (assumes a 70% probability deal closes soon and SIRI trades at $3 at the close and a $9 standalone value).

Sirius Buzz Readers can see more excerpts from this report in the Sirius Buzz Forums.

CITI Report Explained

With the report issued by CITI Thursday, some confusion ensued as to what the report represented in terms of XM Satellite Radio. Some saw the report as a downgrade because the rating on XM is now a hold. The price targets for XM and SIRI in the report represent differing timeframes.

Specific to the merger, the $12.25 price target has been established in the near term and at the time of merger approval (which they believe is due soon and has a 70% chance). Once completed, the XM stock would be converted to Sirius shares. Thus the near term target for Sirius is $3 and XM is $12.25. Once the merger happens, the long term outlook happens. This is where an $8 to $10 target is arrived at for SIRI (as a merged company).

As standalones, the longer range target for XM is $9 and for Sirius is $2.25. Obviously, the analyst believes that the merger makes the sector more attractive.

Position: Long Sirius, Long XM.

Related Articles

This article has 80 comments:

  •  
    Apr 25 06:44 AM
    I have to say, this guy is a nut. 55 million subs by 2011? That means that the combined company would have to grow by over 200% by adding nearly 38 million subs from where it is now in the next THREE YEARS. Not happening.

    I say this as one of the biggest supporters of the merger, so dont jump down my throat so quickly. I am just being realistic. There is no way the company grows over 200% in the next 3 years. Even at a VERY nice growth rate of 21% per year, that only puts the combined company at 45 million subs, and that is a tough growth rate to maintain.

    Love the fact that this guy believes in the combined company and that the merger is a done deal, but we must be realistic in our expectations.
    Reply
  •  
    Apr 25 07:39 AM
    200% growth does seem high to me, as does an $8 targer for Sirius, but not overly so. I'd say it's improbable, but not impossible.

    On another note, this article is quite a reversal from this site's previously pessimistic opinion of Sirius and the merger.
    Reply
  •  
    Apr 25 08:38 AM
    Nothing more than a positive article to drive up the stock. It will be shorted when earnings come out and the merger will be delayed until late May.

    Reply
  •  
    Apr 25 08:48 AM
    LOVE THE ARTICLE AND I'AM A BIG HOLDER OS SIRIUS STOCK ITS MY GUESS THE STOCK WILL TRADE UP FROM HERE SOON TO BE IN THE $3.50 RANGE POST MERGER AFTER FCC GIVES IT'S EXPECTED NOD TO $5.00 A SHARE. ENJOY THE RIDE!!!!!
    Reply
  •  
    Apr 25 09:26 AM
    I really do not think this merger is getting done. The FCC does not want to make a decision and will pocket veto their decision. By July this will force SIRI to reluctantly withdraw their bid. Chaulk one up for the lobbying efforts of the "babel radio", over the air radio industry. The biggest losers are consumers like me who hate over the air non-stop commercial radio.
    Reply
  •  
    Apr 25 10:34 AM
    I really think the merger is already done. The estimate from citi might not be so far off. That many radio's will exist, that can and will be activated again in certain cases. You can't beat fresh content, news, shows and the lists goes on and on. Once people get it in the car, then they will get it in their house, summer house and finally in their boat. TV will be enormous. Sat TV on the boat while I am tuna fishing watching my stocks go up. The upside is tremendous. Unfortunately we are witnessing modern day acts of intentional sabotage by people in power solely to protect their own intrests instead of the whats best for the public. Enough said. The DOJ has broken the ties and the strangle hold on our government. An old monopoly has met it's competition face to face for the very first time. Instead of standing up like a men, they have cried like babies. The merger will happen before May 1st, they have been directed by the DOJ big dogs.
    Reply
  •  
    Apr 25 12:40 PM
    Be wary, be real wary about articles like this. This stock is all about emotion so if it does jump to just over 3 SELL then buy back at 2.50.
    Reply
  •  
    Apr 25 12:53 PM
    70% chance of approval....very interesting yet Yahoo Microsoft is
    preceding as though that merger is a slam dunk! You get the idea msft and Yahoo ok....siri and xmsr not ok? Why doesn't Mr Karmazan get with the program! blast the FCC!! and demand this approval go forward...
    Reply
  •  
    Apr 25 01:06 PM
    THERE IS NO WAY THIS MERGER WONT GO THRU. FCC'S HANDS ARE TIED ON THIS ONE THANKS TO DOJ.......WHAT DOES FCC SAY WE DISAGREEE WITH THE DOJ. FCC JUST WANT S TO LOOK LIKE THERE INDEPENDENT FROM DOJ THATS WHERE THEIR IS THE DELAY. BE REAL IF FCC WAS GOING TO SAY NO THEY ALL READY WOULD HAVE. MY GUESS IS REAL SOON MAYBE ON A MONDAY MID MORNING. $5.00 A SHARE ON THE MERGER APPROVAL.
    Reply
  •  
    Apr 25 01:56 PM
    what's putting pressure on the stock today? anyone?
    Reply
  •  
    Apr 25 02:07 PM
    Pain, User 168418
    If this is going to be approved by May 1st and is running up to $3.50 before then, they've got about 4 days to get it done. why would they wait 'til the last minute? If Siri/XM don't make an announcement that they have extended their agreement (again, waiting on FCC) then that may mean you are right. Or it may mean that one of them is backing out of the deal. Either way, it seems ridiculous that the FCC would force Siri-XM to revisit an agreement ext. just because FCC hasn't, after 5 weeks since DOJ, made and announcement and decided on spectrum allocation already. good grief almighty.
    Reply
  •  
    Apr 25 03:07 PM
    Ha Ha, the stock didn't spike on a positive article for once. I guess the game is over manipulating this stock. The normal trader is figuring this game out. We all know the flow now. "Devise a positive article, get people to buy, then start bashing the stock back down again." Also, I agree with 168418 the FCC is making a point their not letting DOJ dictate what and WHEN they make a decision. In other words the FCC is making a point here. Maybe FCC would have already made a decision if DOJ hadn't approved. Something to think about.
    Reply
  •  
    Apr 25 03:15 PM
    Why should we expect the stock to pop to $5 after a merger announcement? Most people seem to believe this will (eventually) get done, so isn't that probability already priced into the stock?
    Reply
  •  
    Apr 25 03:50 PM
    This stock is going to jump a little on the final announcement. What we are waiting to find out is the FCC's stipulations for the merger. That's why the stock hasn't jumped yet. Also, the real catalyst for this stock will be refinancing xm's debt in this period of stricter lending. Once that happens and the companies can show that they've bought another 12-18 months of time to make positive strides towards profitability is really going to drive up the price of the stock! The reason why there is pressure on the stocks today is because the reports about the merger not being announced until late May early June. The longer it takes the more it DESTROYS these companies chances to succeed in a very competitive market
    Reply
  •  
    Apr 25 04:04 PM
    Simz-
    where are those reports/articles? i haven't seen them.
    Reply
  •  
    Apr 25 05:17 PM
    Great show on Sirius Buzz radio last night Tyler, it looks like you got all the bugs worked out. I like how you go into more detail of your articles that are put out, here and at your site.
    Reply
  •  
    Apr 25 05:25 PM
    verygreatness

    Would not want to sell or buy based on your writing.

    Noone here knows what will happen with the price of the stock.

    Reply
  •  
    Apr 25 05:32 PM
    Simz...., Your the first that has pushed the decision out to the end of May, early June. Stiffel's analyst suggested a decision announcement at the next FCC open meeting mid May, but this to would mean forcing the companies to extend their agreement beyond May 1st due to FCC indecision.

    My biggest fear is a "no decision", "pocket veto", "Let-the-companie... die-on-the-vine", attitude that seems to be taking shape at the FCC. This attitude has been developed with help from all the opposition, and it is devastating. No decision is a decision.

    We will know in just a few days. If the waiting is going to continue, the companies will have to announce an agreement extension, if not the decision from the FCC will be announced before May 1st.

    A pull back today in the stock is just a little nervous and maybe smart, profit taking from the investors who have taken advantage of purchases at 2.36- 2.45. If you bought 10,000 shares then, why not take some off the table with a nice little 9% gain. No announcement "Should" make us nervous, and taking a "little" profit while we wait an wonder on low volume is OK. "Longs" can make money too you know.

    Even after an announcement of a merger approval, and the initial surge, with shorts covering and current spectators afraid they'll miss the boat, small investors will be in and out of this stock from here to $5.00 a share, and that could take until the end of the year. Once the ETF's get involved, above $5.00 a share, the ride up should smooth out a bit. The reality is until the new company shows strong signs of positive performance, positive FCF with a date certain of profitability achieved, it will be a high beta stock.
    Reply
  •  
    Apr 25 05:34 PM
    What about the target price of the combined company? Anyone think its a little conservative at 8 to 10? I imagine it won't take them long to achieve positive cash flow, once they merge, and the Street will reward the stock from that point forward, with each quarterly earnings report getting better as they do get more subs.
    Reply
  •  
    Apr 25 07:00 PM
    163888....

    Thank You for the kind words. If you like the radio show please pass it along to others, and rate it. Feel free to drop an e-mail any time
    Reply
  •  
    Apr 25 07:56 PM
    the fcc has had it out for Howard stern, the only reason why this has not been approved is because the fcc is run by bush's men and they cant stand for anything good to happen to stern and followers. The FCC HAS COST SHARE HOLDERS BILLIONS, THIS IS A JOKE! Stern always wins!!!! bu yaaaaaaaaa
    Reply
  •  
    Apr 25 08:40 PM
    They did run a commercial on Howard, when he first moved to Sirius, that said "F**k the FCC!", but, by delaying the merger, they do no harm to Howard Stern. Instead, they are hurting the consumer and the investor. Not to mention, they make themselves look like a puppet on a string held by terrestrial radio and "the rev." Jesse Jackson.
    Reply
  •  
    Apr 25 11:15 PM
    I do not think 55 M subs is unrealistic. I am waiting for approval and the new radios before signing up. How many other people are doing the same. With $7 a la carte programing many will join the SAT RAD craze. Almost every car in America will have a factory installed sat rad by and the $7 sub fee will decrease churn rates. New SATS will be launched in 2009 and 2010 so by 2011 55 M subs is realistic.
    Reply
  •  
    Apr 25 11:31 PM
    Well..Well..... Eight bucks, eh? Yes all the shorts continue to plauge this blog as if a 1 day 1% profit taking Friday sell off matters. if you look at the chart this is acutally very healthy. It creates a nice "stair step" pattern that set a base for higher highs. As predicted (se my previous post on last news release) we saw resistance at $2.80 (yawn). I say we see just under $4 next week. Those that doubt me should take a look at the options chain, then take a look at the trend, then read a few books or take a class on finance. If Citi comes out with this kind of new the real translation is that they know that the financing for the merger will go through (yawn again) and that there is no where to go but up. So say maen things if you want. Curse me and call me out. Next week you shorts (now 157M shares) will wish you covered. By the way Howard Stern should shut his mouth and grow up. how does taunting the FCC help anyone but his ego? I love and respect the guy, but these govt. folks love to make a point and that is exactly what there doing. One last thought. The merger will go through on or before the first becuase the FC released iy's meeting minutes last week and SIRI was not on the agenda. Can't you guys take a hint? Long 68k SIRI. See you next week!
    Reply
  •  
    Apr 25 11:34 PM
    PS sorry about the spelling ... I'm on the beach in the caymans and I keep knocking over my Corona. :-)
    Reply
  •  
    Apr 25 11:37 PM
    PPS.... Hey Serious Sirus... Do you think we could do 55M subs if apple used that new GPS Satillite reciever they're putting in the iPhone 2.0 to pick up Atlas (SIRI satllilte)? Hmmmmm.....
    Reply
  •  
    Apr 26 03:04 AM
    Serious Siri - I'm waiting for approval and the new radio before signing as well.

    I agree with you NotVerySmart, that there might be something very interesting to the forthcoming GPS addition to the iPhone. It's tantalizing.
    p.s. you're smart. do you have a website or blog? and i hope you are right about next week's Sirius developments!
    Reply
  •  
    Apr 26 09:29 AM
    BlogTrog - Your're very kind. And yes I do have a site (I own several tech companies) but as I am a priciple in them, I think it's conflict to share it here.

    I like to play the "short contrarian" plays as shorts are greedy bastar...s that are extreemly adverse to risk. If you think (regular) people sell on bad news you should see shorts cover on good news. They (shorts) are strictly technical players that are opportunistic and short term minded. They don't care about company potential or relative strength, they just see a stock tanking a dive and jump on. When you see a stock shorted more than 10% it's a strong sign they will move to get thier porfits out on a bump. A good example of this (besides SIRI) is TASR (I make no reccomendations here). Bad earnings got them a 25% drop last week and if you eye the chart you'll see there is a standard dip then recovery (short - then cover). I would wait a few more days on this one (TASR), beacuse it looks like it will take 'till Wednesday before the big move back up happens, but whenever you see a dip that is over done in a compnay with little risk (no debt) and strong contracts or sales momentum, it's a short contrarian play. I want to reiterate that I AM NOT RECCOMENDING TASR for the regular folk. The long term trend is poor, but it is definatley oversold (27.1% of float out in shorts) and will pick up a few bucks next week. Should hit about 7.20 then bounce to $9. The only thing I'm long in for the long term plays is GOOG. With the idiots at YHOO likely to turn away the 50% premium from MSFT, GOOG wins next week and beyond. I also like APPL a lot, but the upside is overdone and I'm looking for a $152 handle before I buy it back.

    But I digress....I really like SIRI both long term and short term because they have legs. They will beat earning estimates, they will get FCC approval (see DOJ reccomendation) and they will hit $5 in the next Q. I have reset my short term sell target to $4.08 (sell 20% to play with the house's money) and moved my long term target to $5.70 based on technical data. I am a high risk player, so please take my words with a 10 pound block of salt.

    Disclosure:

    Long SIRI 69.5k
    Long TASR 12.2k
    Long GOOG 523 shares

    I wish all of you the best. Take care. I'm gonna go parasailing now. :-)
    Reply
  •  
    Apr 26 01:33 PM
    NotVerySmart
    great feedback! watch out for the sharks out there!
    Reply
  •  
    Apr 26 03:02 PM
    NotVarySmart, I might agree with the short play in most cases that would be true. The exception here is SIRI Shorts are playing in my opinion the spread with XMSR. As you have said and is well known the merger is in most peoples opinion is good news for the stocks and is not to far off. You might have been right before the DOJ gave its approval but now that opinion on this stock is, I feel way off. It is clear now that it is the spread that is being played. For instance the shorts in SIRI went up after the DOJ approved. If your opinion was true the opposite would have happen, but it did not.

    It is clear at this point that most SIRI shorts are also longs in XMSR, and are playing it that way for the certain gain.
    Reply
  •  
    Apr 26 03:43 PM
    Monk26, I agree, it has been my personal experience in dealing with various city siteplan and city counsels that the last thing you do is tell them anything. The only thing they want to here is how much are you going to kiss my ass. I had one siteplaning commission hold me up on a project for a year and a half after I got the city councel to over turn their decision. They did it on things like the placement of a dumpster, that was good for 3 months. Siteplan also cost me an extra 200,000 in construction cost because they would not let me drain my run off water into the citys system, that was good for 6 months, and so on and so on. All this because we questioned why they were being so difficult on a lot split that met all the requirments to be split. It is difficult to sue any government and win even if you are in the right and is only used as a last resort.
    Reply
  •  
    Apr 26 10:30 PM
    163888 (if that is your real name - tee hee) - I'm open to any opinion and would surley appreciate correction if warranted, however the stock did go up , then down -after- the DOJ approved. If your statements are correct, how do you explain this? It goes up with approval and down with anticipation. I get the spread action, but this is a pre-merger speculation play. Once the we collapse the wave function (Shrodinger) and the merger happens, those plays are dead (thus the covering last week). It does look like there may be some short term weakness, (a day or so) but I just don't see SIRI not reacting as it did when DOJ first passed approval. I feel that the spread play is dead because we are so close to closing the deal (or earnings). I guess we'll both have to wait until next week to see who's right. Good luck my freind. I truly hope you cover and save the kids college fund. I don't like to see anyone get burned. Take care.
    Reply
  •  
    Apr 26 10:35 PM
    P.S. - Final proof of my assumption is here in the press release (above). A Citi downgrade on XM and upgrade on SIRI means only one thing.....cover your shorts now. The merger is comming.
    Reply
  •  
    Apr 26 10:52 PM
    PPS - Secondary proof is in the options chain still 10-1 (calls over puts) @ $3 and 5-1 (calls over puts) @ $4, this is not only in May calls but the whole spread. See for yourself and cover Monday before it's too late. Take care.
    Reply
  •  
    Apr 27 09:52 AM
    NotVerySmart... You are proof that Sun, Suds, and the sound of the Waves clears the mind....Thank you for your incites they are reassuring.

    I agree that the arbitrage spread is dead, if your long XM you might as well stay long until the merger, but running for cover if your short Sirius is a great idea. Buy in Monday and stay long.





    Reply
  •  
    Apr 27 12:29 PM
    did you know about this guy? (woman) i didn't. fascinating article.

    ap.google.com/article/...
    Reply
  •  
    Apr 27 02:46 PM
    NotVarySmart, First, if most of the shorts were in because they felt SIRI was going down, then the price would have gone much higher then the 3.26 if it were shorts covering. (I am not counting the spilt second pop to 3.89, the volume was not their and could have been a "market maker" mistake.) Second, what did we see happen after the DOJ approved, shorts in SIRI went up, not down ( the merger is more certain now). What person thinks the merger is bad for SIRI, answer = vary few, certainly not enough to not only keep short holdings were they were at, but also go up.

    It is clear you do not get the the arbitrage play at hand. The reason I say that is, it is a play inwhich you wait till after the merger gos through (ie. you are hoping the merger gos through). You wait till after the companies are compined and then use the long you bought in XMSR (lets say 10,000 dollars) which is then converted to SIRI, to cover your short in SIRI (once again it has to be 10,000 dollars, the same as you put in XMSR), you then get the difference in SIRI shares that are left over. The other reason I say you dont get it, is you think for some reason I am short SIRI inwhich the kids collage fund is at risk. While if I was playing the arbitrage this way (I am by the way long long SIRI/XMSR) there would be nothing at risk, this is a way to play it and have almost no risk, all be it limited gain also.

    I say this, it makes no sence any other way for the short holdings to go up after the DOJ approved. That most people think the merger will happen now and SIRI will go up. The only lodgical reason anyone would be shorting SIRI from the time the DOJ approved to now, is to be playing the arbitrage spead between SIRI and XMSR.

    If you do not see what I am saying after explaining it a second time, your name covers you vary well. But as you said we will see how much the short holdings go down after the FCC approves, I think it will happen after the companies merger and the 4.6 SIRI are given for each XMSR share. There will be little short squeeze while there will be a move up it will be nowhere near the 5.00 people think. I do not think there are enough shorts channel serfing to make up for the people that just want out. I would like to make this clear with the exception of 5,000 shares I bought back at 2.45, I am long with my main holdings in both. I am in for at least three more years, unless I get another DISH, I will start selling before that time frame. So please, the rest of you dont make the mistake NotVarySmart made by thinking I am a short seller. I cannot believe anybody could make the mistake that I was, if they understood the arbitrage play, but some how NotVarySmart did make it.
    Reply
  •  
    Apr 27 03:50 PM
    I tried XM Radio with my BMW, but I just don't like it anymore. I do not see the specialty. And now, I have a new HD Radio Tuner installed and in replacement of the XM unit.

    Am I the only one out there?
    Reply
  •  
    Apr 27 05:08 PM
    This merger will be approved.
    Reply
  •  
    Apr 27 05:23 PM
    Not Worth The Extra, yes you are. Let me guess you bought it used and is a older model. I say that for a few reasons, But I will only give you this one and let you figure out the other. Most people that buy a new BMW will not care about the 12.95 a month they pay, they may also want HD radio, just because they want everything they can get. I was wrong, I will give the other reason, BMW is a Sirius OEM and comes standard in most models. Now I dought vary highly you got the two mixed up if you had ether, for any period of time. Maybe you got your cars mixed up instead Porsche, and saab are XMSR OEMs, LOL.
    Reply