Sirius XM Radio Inc (NASDAQ:SIRI) recently reported its Q3 earnings results that beat analyst estimates, while its Q4 and 2013 guidance promised an improved subscriber base, which is expected to bolster revenue. However, a closer look at the company’s model, as analyzed by Bank of America Merrill Lynch analysts, Jessica Reif Cohen, Judah Rifkin, and Peter Henderson, Sirius XM Radio’s model seems to be near perfect. The analysts noted, that there are few, if any, potholes in SIRI’s model.
Sirius XM Radio To Reduce Fixed Costs
David Einhorn’s Greenlight had a strong fourth quarter; Gains on Neubase Therapeutics [Q4 Letter]
David Einhorn's Greenlight Capital was up 5.2% in 2020, underperforming the S&P 500's 18.4% return. For the fourth quarter, the fund was up 25%, which was its best quarterly result ever. Longs contributed 42% during the fourth quarter, while shorts detracted 15% and macro detracted 1%. Q4 2020 hedge fund letters, conferences and more Growth Read More
Fixed costs are any company’s nightmare. They cannot be easily manipulated to increase net profit margins. The thought of SIRI being able to reduce its fixed costs comes as a bonus for the Satellite Radio Services provider. According to a report published Monday, bank of America Merrill lynch analysts highlighted the company’s long-term commitments that are about to expire. While Sirius XM Radio Inc (NASDAQ:SIRI) fixed costs for 2013 are estimated to be about $300 million, the company is yet to eliminate some key fixed costs.
The analysts noted that several key program agreements are set to expire, including the expensive Howard Stern contract and Sirius’ inherited an MLB deal (from XM, est. at $60mn/yr), both due for renegotiation in 2015, which they believe will yield more favorable terms. Additionally, other programs, such as ESPN and Fox News, are set for renewal in 2013, and NHL is scheduled for 2015. The analysts believe that the renewed terms should be cheaper than the current terms.
Furthermore, since Sirius XM Radio Inc (NASDAQ:SIRI) completed its merger, fixed costs associated with content deals have declined significantly. The analysts noted that renewed contracts can boost margins by up to 500bps between 2014-2016 and that these savings should all fall to the bottom line.
Car App Not Easy To Quantify
The analysts also pointed out that Sirius XM Radio’s Inc (NASDAQ:SIRI) used car app is difficult to quantify. They said, “SIRI currently has relationships with 7k+ secondary dealers, where it receives customer information in exchange for free trials. Private secondary market transactions account for about one-third of used car sales, most of which are unlikely to benefit SIRI directly”. The analysts estimate that more than 130 million new cars will have install options for SIRI OEM app in 10 years.
Buybacks for Capital Returns
The analysts believe that Sirius XM Radio (NASDAQ:SIRI) will repurchase $2-3 billion worth of shares and dividends, resulting into a sum total of the equivalent amount, in capital.
Additionally, while the CRB decision remains imminent, the analysts believe that Royalty costs increments of about 0.5% will be passed on to consumers. The analysts expect EBITDA to increase by 40bps, to 40%, and by about 200bps in 2016.
The analysts have rated the stock as BUY, with a price target of $4.00 per share. Sirius XM Radio Inc (NASDAQ:SIRI) closed at $2.75 per share on Friday.