Sirius XM Radio Inc (NASDAQ:SIRI) revenue growth from 4 percent, in 2009, to 13 percent, in 2012, is fueled by price and volume, says a report from Morgan Stanley (NYSE:MS) by Benjamin Swinburne and Ryan Fiftal. In the second half of 2013, there are possibilities that US auto sales will be at pre-crisis highs and 2012 pricing will “fully roll through the sub base.”
Sirius XM Radio Inc (NASDAQ:SIRI) pre-announced net adds of 715K in the second quarter, which was more than the expectations, backed by strong vehicle sales and inventory builds towards the end of the quarter. Growth in net adds, in the quarter, is due to subscriber recognition upon shipments from the factory by many OEM partners.
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Morgan Stanley is expecting self-pay churn of 1.9 percent and adjusted EBITDA margins of 29 percent. In the second quarter, focus will be on the success in the used car market. According to SIRI, around 80 percent of US homes have at least one used car and around 20 percent have new cars, which is evidence of the importance of the used cars.
Analysts noted that connected car will see increased competition in times to come, but is still not near to broad penetration to in-dash connectivity. There are speculations regarding the share repurchases of around $2 billion on the low end, based on authorization and growth rate and approximately $3 billion high-end if Sirius XM Radio implements a holdco structure to raise capital outside its RP limited operating cost.
Analysts at Morgan Stanley have assigned “Equal Weight” rating to stock on account of Solid top line growth along with incremental margins and benefits from merger, which will lead to 25% adj. EBITDA CAGR in ‘13E-‘15E. Morgan Stanley has set the price target up to midyear 2014 and raised auto sales projections for 2013 and 2014 more than offsetting lower ARPU leading to higher price target of $3.50
Risk and catalyst for Sirius XM shares
According to the report, risk that can affect the price target set for the stock is increased competition for consumers’ listening durations in automobiles with the advent of internet enabled devices can affect sub additions.
Business was affected at Sirius XM Radio Inc (NASDAQ:SIRI) due to economic sensitivity in the last recession, which reflects that any decline in the economic trends or SAAR will bring the shares and results lower. On account of increase in investment needed in the core business, SIRI will repurchase lesser shares than expected.
Primary catalyst for growth in stock will be a price increase of $1.50 in January 2012, this will continue to run through the customer base through midyear in 2013 and CRB rate decision for ’13-’17. Other catalysts are acceleration to US auto SAAR and growth rate of SIRI’s $2 billion buyback authorization.