Sirius XM Holdings Inc. (NASDAQ: SIRI) has just received its most bullish sell-side analyst rating on Wall Street. Credit Suisse’s Brian Russo has raised the bar on Sirius XM with an Outperform rating with an $8.50 price target.
What makes this call unique among the Sirius XM bulls is that it passes the prior street-high analyst price target of $8.00, and it is well above what was the prior Thomson Reuters consensus analyst target of $6.74.
Credit Suisse sees the driving force here being a continued execution and stable competition meeting a strong stock buyback to generate a stock that is expected to outperform the market. The call implies 21% upside from the $7.02 prior closing price, and that is handily above the current average upside of 8% to 10% for most S&P 500 stocks with new Buy and Outperform ratings at this stage of the bull market.
The analyst report called out Sirius XM as having an exceptional business model with more revenue and free cash flow per employee than 90% to 95% of the S&P 500, having a solid execution track record and having a visible runway to 2020 for subscriber growth of 3.3% annually, revenue growth of 5.2% per year and EBITDA growth of 5.5% per year through 2020. More specifically, Russo called Sirius XM a simple investment story compared with many media and telecom peers.
As far as the stock buyback is concerned, the expectation of $2 billion per year is against an $8.1 billion float. That said, Sirius XM has $31 billion market cap when you consider the Liberty SiriusXM Group (NASDAQ: LSXMA) and Liberty SiriusXM Group (NASDAQ: LSXMK) shares with their more than $15 billion market caps.
Another important issue here is that the call sees stable U.S. auto sales ahead, which may get in the way of some of the peak auto concerns. The call is based on 16.8 million car units sold in 2018, and 16.5 million units sold in 2019. It also points out that Sirius XM’s service will increase by approximately 36 million over the next three years, and that is expected to lead to a gain of 2.8 million subscribers to the satellite radio giant through 2020.
As far as competition, Russo’s note said:
Sirius XM has grown by 8.5 million subscribers, while smartphone penetration has gone from 45% to 77% and streaming music services have seen tremendous growth (Apple Music +50 million global paying subscribers, Spotify Premium over 70 million). With two-thirds of Sirius subscribers regularly streaming and Sirius offering differentiated content, we believe the products are more complimentary than substitutive.
Again, this $8.50 price target is handily above the consensus target. It equates to 22 times the 2018 EBITDA and 19 times the 2019 estimate from Credit Suisse. As far as the tracking stock issue, Russo concludes:
We note majority owner Liberty’s tracking stock (LSXM) offers an effective discount on Sirius XM shares, but we do not expect this to affect Sirius XM’s performance.
The firm noted that shares are up 84% over the past two years, while the LSXM discount has gone from 15% to 32%.
This Sirius XM analyst call would normally stand out with more emphasis considering that it is ahead of earnings season and is the most bullish on Wall Street. That said, this call came out on a day where the news flow is dominated by trade war and NATO saber-rattling.
Sirius XM shares were last seen up fractionally to $7.07, in a 52-week trading range of $5.17 to $7.70.