We reaffirm an Outperform rating and 2016-based price target of $4.60 on Sirius XM Holdings.
The step-up for 2017 offers further upside, factoring in continued, solid earnings before interest, taxes, depreciation and amortization (Ebitda) growth. Liberty Media SiriusXM tracking stocks ( series A (ticker: LSXMA), series B (LSXMB) and series C (LSXMK)) provide another way to participate, and at a discount. Liberty’s interest in Sirius XM (SIRI) is roughly two-thirds. Yield on the newly declared dividend is 1.0%.
The 360L program is intended to create software-driven options that will increase the flexibility and personalization of the Sirius XM experience. However, while the availability of Sirius XM content in the home, in businesses and other locations will be enabled through [privately held] Sonos, the Internet service and other devices, it is clear that Sirius and XM service offerings will remain very car-centric. Significantly expanding seasonally adjusted annualized rate levels have pushed subscriber levels to new records, and rising used-car additions are poised to offset some of the inevitable weakening in new-car additions that are likely to develop at some stage.
However, even though stable churn rates applied to increasing subscriber levels demands ever-increasing numbers of additions just to stay even, continuing high levels of auto sales and high penetration rates in new cars combined with rising uptake in used cars are continuing to fuel Sirius XM’s core business. Management continues to focus significant effort on new programming channels of various types and musical genres to sustain its unique position in an audio arena in which competition offers music that can be commoditized or heavily laden with commercials.
While the company continues to pass through price increases, it has not noticed a considerable uptick in churn as a result and still continues to grow subscribers at a solid pace. Sirius XM’s primary competitor is free terrestrial radio, which is the primary destination for churned customers. The ability to compete with free radio is through proprietary content, optimizing its appeal to a wide user base by super serving individual tastes with compelling content.
Over the past few years, return of capital via repurchases has totaled over $7 billion, and is now being supplemented by a newly established recurring dividend, beginning at four cents per year. Additionally, the board authorized an additional $2 billion in repurchase authorization. Leverage of 3.4 times could be taken to the target of 4.0 times, providing additional sources of funding for repurchases. Sirius XM returned about $300 million to shareholders in the third quarter.