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Merrill Lynch: Merger Or Not, Sirius Is Undervalued
According to a Merrill Lynch report, whether there’s a merger or not, Sirius Satellite Radio is undervalued, and Merrill is reiterating their “Buy on Sirius with a $5 PO, yielding 72% potential upside.”
The report continues: “In our view, shares are oversold given Street expectations for little, if any, probability the proposed XM merger will get approved (MLe 60% probability) and the lingering impact of concerns about retail demand, long-term churn, and conversion of promotional subs to self-paying. We continue to believe the shares have upside potential using our reasonable, and often conservative, assumptions, including: 1) 80-85% of long-term gross adds are from auto 2) declining ARPU (ignores data impact), 3) combined 40mm subscribers in 2014 – comments by
both Sirius and XM suggest this level in 2010, and 4) annual FCF exceeds $1bb in 2016.
“We forecast churn remains stable, 50% of auto subs convert to self-paying and CPGA declines over time. Our estimates and PO ignore the benefits of the proposed merger, which we estimate could increase Sirius’ fair market value by another $1.40/sh. While we are largely maintaining our 2Q07 and FY07 ending subscriber forecasts, we are reducing our gross addition and churn estimates, which result in reduced SAC and EBITDA deficit estimates.
“We forecast 2Q07 revenue of $229mm ($949mm for FY07), ending subs of 7.1mm (8.2mm for FY07), and EBITDA deficit of $88.1mm, down from $90.2, in 2Q and $329.9 down from $347.7, for FY07.”
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