Mel Karmazin recently bought two million shares of Sirius XM for just over $1.37 each, but Goldman Sachs analyst Mark Wienkes thinks the CEO overpaid. Wienkes, who had pre-merger Sirius on his sell list for some time, has a new six-month target price of exactly $1.00 for the merged company.
“Sirius XM is moving closer toward EBITDA breakeven, but the worrying sub trends, rising churn, falling ARPU [average revenue per user], higher interest expense, and pending capex needs seem likely to make realization of free cash flow – sufficient enough to justify the valuation – challenging at best,” Wienkes told clients.
While the consensus of his Wall Street peers is that Sirius XM will add 2.9 million subscribers in 2009, Wienkes thinks the number will be “2.1 million at most.”
“We think the retail satellite radio market remains and will remain weak and the increasing gross OEM penetration and gross subscriber additions have up until now masked the rising underlying churn. We believe subscriber growth has passed its inflection point as churn is now on track to jump to approximately 2.7% per month, or +31% of the base on an annualized basis, with expectations for long run churn in the 2.7-3.0% range,” Wienkes wrote.
The analyst says he was actually being generous in arriving at his valuation of a buck a share. He used a cost of equity (COE) of approximately 10% in his discounted cash flow (DCF) analysis. “Using a more appropriate 13% COE, our DCF analysis would imply approximately $0.45 per share,” he noted.