Goldman, Sachs unmoved by Sirius Q3
Yesterday's Q3 report from Sirius, while it was a record-breaker (11/2/05 RBR #215), it didn't change Goldman, Sachs & Co.'s Mark Wienkes' outlook on the stock - - it's still ranked as Underperform in his view.
Read his analysis here
"Sirius' 3Q was largely in-line with our and consensus estimates and does nothing to change our thesis on the stock or the sector. The company raised its FY sub target modestly from 3M to just over 3M. We raised our total subscriber estimate to 3.1M from 3.05M to reflect upside in 3Q. We continue to believe that Sirius lags its duopoly competitor XM in fundamentals, technology, & subscriber economics and as such prefer XM (IL/C) to Sirius given the valuation discrepancy. That said, we believe that Sirius is well positioned to gain retail share in the 4Q holiday season as we expect heavy promotions of Howard Stern's Jan 2006 arrival. We expect FY05 rev and EBITDA of $240M and ($545M) vs. $235M and ($551M) previously. Sirius reported 3Q05 revs of $67M vs. our $61M and EBITDA of ($112.3M) (pre-equity grants) vs. our ($121M) estimate. The co. reported a 3Q LPS of $0.14 vs. our $0.15 est. Maintain U/C.
We rate Sirius Underperform within the context of our Cautious coverage view. We believe overly optimistic market expectations and an aggressive corresponding valuation will result in Sirius underperforming our radio coverage group over the next twelve months. Although Sirius has vastly improved its business viability and value proposition, cash flow breakeven timing remains a year away as programming and subscriber growth expenses continue and competitive technologies loom. We still expect Sirius to generate positive free cash flow in 2007, though management suggested that it could happen as early as 4Q06. With the current satellite radio enterprise valuation split 52%/48% between Sirius' (favoring Sirius) and duopoly competitor XM Satellite Radio (XMSR: IL/C), we continue to believe that the valuation gap between the two will widen (favoring XMSR) to appropriately reflect the disparity in the businesses progress (XM targets year end subs of 6M, Sirius targets +3M, expanding the gap in absolute subs). Said differently, we do not believe the fundamentals, subscriber growth curves, or risk adjusted estimates support a near parity valuation. Our discounted cash flow and P/E to normalized growth analyses imply a fair value of about $5 per share, which represents nearly 25% downside potential from current levels."
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