Merrill Lynch on Why Sirius XM Can Go to $5 After Earnings

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Sirius XM Holdings Inc. (NASDAQ: SIRI) reported solid third-quarter financial results before the markets opened on Thursday, and as a result one key analyst weighed in on this satellite radio provider. The company had earnings per share (EPS) of $0.03 and consolidated revenue of $1.17 billion.

Merrill Lynch maintained a Buy rating with a $5 price objective, for upside potential of 28%. In the firm’s view, Sirius XM presents a core pay-entertainment holding, considering its fast growth and a revenue compound annual growth rate of 7%. The firm also noted a 70% contribution margin, a sizable capital return capacity, rising new car penetration and vast potential in the used car channel.

A few other highlights from the earnings report were:

  • Free Cash Flow Per Fully-Diluted share increases 54% to 6.9 cents.
  • Cumulative share repurchases now exceed $6 billion.
  • Repurchased $553 million in stock during the quarter versus an estimated $575 million. The company has about $2 billion remaining under its share repurchase authorization.
  • Revenue guidance is now roughly $4.53 billion versus approximately $4.5 billion prior, while sub guidance has been raised to net additions of approximately 2 million compared to about 1.8 million previously.

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However, there are a few risks to this call. Macro environment/auto sales have greatly improved since their lows in 2008 and 2009. If these sales were to subside, there could be a negative correlation to satellite radio subscriber forecasts. It also remains unknown how many Americans will ultimately adopt pay-radio, which, if lower than forecast could have further negative implications.

Jim Meyer, CEO of Sirius XM, said in the earnings release:

With subscribers at an all-time high of nearly 29 million and record adjusted EBITDA and adjusted EBITDA margin, our third quarter was one of the strongest performances in our company’s history. We are confident of our continued success in the fourth quarter, and we are increasing our guidance for self-pay and total net subscriber additions, revenue, and adjusted EBITDA.

SiriusXM’s diverse bundle of valuable content is our biggest single competitive advantage. Since the start of the third quarter, we extended our long-standing relationship with the NFL for another six years. We also successfully launched an exclusive channel created with Andy Cohen; and we launched our new and exclusive 24/7 original headline news channel with FOX News. Stay tuned for more announcements as we continue our non-stop efforts to add and retain differentiated, exclusive content to our bundle.

Shares of Sirius XM were last seen trading at $4.02, with a consensus analyst price target of $4.63 and a 52-week trading range of $3.27 to $4.07.

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