Sirius XM a four-bit stock


That’s the latest price target from Goldman Sachs analyst Mark Wienkes, who says there is a market for satellite radio, but that the debt laden company’s stock is still overpriced. So he’s set his six-month price target at 50 cents.

Wienkes maintained his long-held “sell” rating on Sirius XM. He said he cut the target price from a buck to a half buck to reflect further erosion of satellite radio industry dynamics and his belief that the company’s 2009 target of $300 million in positive EBITDA is “possible but unlikely.”

The analyst cited subscriber churn and looming credit maturities as he once again slashed his target price for the company resulting from the merger of Sirius and XM. “We still see a viable market for satellite radio, SIRI’s niche, in our view, with a sole provider subsidizing mass market distribution and programming. Our base conclusion of overstated equity valuation relative to the expected free cash flow opportunity matches our prior analysis; however, the nature of our concerns has shifted toward the viability of the business model given current sub economics. That is, we believe the company will need to add roughly 8.5-9 million gross subs just to net approximately two million new subs in 2009. With an approximate $100 CPGA (cost per gross add), that equates to approximately $420 CPNA (cost per net add), or more simply, around $650 million of aggregate spending just to replace churned subs. This trend of only approximately 24% of ‘additive’ 2009 (estimated) gross adds vs. approximately 46% in 2007, with falling ARPU (average revenue per user) trends, higher interest burden and contracted capex, combine to likely make realization of free cash flow – sufficient enough to justify the markets currently allotted valuation – challenging at best,” Wienkes wrote in his latest research piece.

Sirius XM has over $1 billion of debt maturing in 2009 which will have to be refinanced. And the analyst believes the company will also have to borrow more, since operating cash flow won’t be sufficient to fund satellite capex. In an understatement, he notes that the current conditions in the credit market “complicates” that refinancing.

RBR/TVBR observation: If the economic climate ahead is going to be even tougher than what we’ve been through the past few months, it would be especially tough to try to turn around a business that has never produced a penny of positive EBITDA. Mel Karmazin really has his work cut out for him.