Sirius XM Holdings: Valuing As A Standalone Concern (NASDAQ:SIRI)

Potential has a shelf life. – Margaret Atwood, Cat’s Eye

Today we Sirius XM Holdings Inc. (NASDAQ:SIRI) in the spotlight for the first time.. The company is solidly profitable and the shares trade near the bottom of a year-long trading range. However, the ad market is getting more and more challenging as the economy looks likely to be in a recession at some point in 2023. Can SIRI’s stock hold its current floor in this environment? An analysis follows below.

Company Overview:

Sirius XM Holdings Inc. is based in the Big Apple and provides satellite radio services on a subscription fee basis throughout the United States. The company also provides streaming service offers applications to allow consumers to access its streaming service on smartphones, tablets, computers, home devices, and other consumer electronic equipment, as well as connected vehicle services. In addition, it distributes satellite radios through automakers and retailers, as well as its website. The company also has other offerings such as location-based services. Sirius XM Holdings Inc. is a subsidiary of Liberty Media Corporation, which owns just over 80% of the outstanding shares. The stock trades just under six bucks a share and sports an approximate market capitalization of just over $23 billion.

2023 could be a year of disruption the company. The company is most likely to enter into a share exchange with Liberty Live Nation (LSXMA) sometime this year. Liberty Media is splitting off the Atlanta Braves and associated real estate development projects, and then plans to create a new Liberty Live Group tracking stock. If Sirius merges with Live Nation, it will benefit the latter more than Sirius which should see its leverage increase to nearly five times debt-to-EBITDA as it adds Live Nation’s approximate $2.8 billion. The Liberty Media universe is a byzantine collection of assets and tracking stocks. There was a good recent article on Seeking Alpha covering the intricacies of the different moving parts and potential future combinations.

Therefore, this analysis is focused more on the valuation of Sirius if it somehow remains a standalone company. The majority of company’s revenue comes from the approximate 32 million paid subscribers from the Sirius XM umbrella. The radio subscription service Pandora has approximately 6.3 million of paid subscribers. Sirius also gets a healthy chunk of its overall sales from advertising.

Third Quarter Results:

The company posted its third quarter numbers on November 1st. Sirius posted non-GAAP earnings of seven cents a share as sales rose 3.6% on a year-over-year basis to $2.28 billion. Both top and bottom line results were in line with expectations. Adjusted EBITDA came in at $720 million, flat from the same period a year ago. Free cash flow dropped 44% from 3Q2021 to $329 million

Management guided to full year revenue for fiscal 2022 of between $9 billion to $9.04 billion believes it will produce $1.55 billion worth of free cash flow in FY2022. Subscriber growth was flat at Pandora and rose only one percent overall during the quarter. Advertising revenues were up six percent from the same period a year ago. This resulted in an average revenue per user (ARPU) of a record $15.72, up 88 cents from 3Q2021.

Analyst Commentary & Balance Sheet:

Since third quarter results posted, four analyst firms including RBC Capital and Deutsche Bank have reissued Buy/Outperform ratings on SIRI. All four have $7.50 a share price targets on the stock. Four other analyst firms including J.P. Morgan and Citigroup have reiterated Sell/Hold ratings on the equity with price targets in the $5.50 to $6 range.

Approximately one out of every four shares outstanding is currently held short. Numerous insiders sold just over $12 million worth of stock in aggregate in 2022. There have been no insider sales so far in 2023.

The company ended the third quarter with approximately $40 million worth of cash and marketable securities on its balance against nearly $9.8 billion worth of debt. The firm has approximately $1.35 billion of undrawn revolver capacity. Its net debt-to-EBITDA ratio stood at 3.5 times. Sirius returned $262 million to shareholders during the quarter via dividend payouts ($86 million) and stock buybacks ($176 million). Leadership also announced a 10% increase to the quarterly dividend payment.

Verdict:

The current analyst firm consensus has Sirius posting a 29 cents a share profit in FY2022 as revenues rise four percent to just over $9 billion. They project earnings of 33 cents a share in FY2023 on slightly slower sales growth.

It is hard to get too excited about the prospects of these shares from a standalone valuation basis given slow earnings and sales growth. The stock goes for 20 times this year’s likely earnings, just slightly above the S&P 500 multiple. Neither is SIRI compelling just over 2.5 times revenues given its large debt load.

Rival Spotify (SPOT) trades at 1.4 times sales. While Spotify is not yet profitable, it is seeing much higher revenue growth. The company’s 6.7% free cash flow yield combined with a 1.6% dividend payout seems reasonable.

Sirius is facing headwinds as we commence 2023. New vehicle sales are likely to remain punk thanks to much higher financing rates than in recent years. This should negatively impact subscriber growth. In addition, advertising spend is slowing amid economic uncertainty. This is one reason why Meta Platforms (META) recently announced substantial layoffs. Sirius recently announced that it is looking to reduce headcount as well.

Add in the lack of insider purchases and the huge amount of float currently held short, there is no compelling reason to SIRI at these levels despite the shares being near the bottom of a trading range. In addition, any potential combination with Live Nation doesn’t seem likely to boost shareholder value SIRI stock holders significantly.

All we are not stares back at what we are. – W.H. Auden