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SiriusXM Canada – ‘a monopoly cable company into the car,’ as one analyst describes it – has enjoyed a remarkable turnaround. (SiriusXM Canada)
SiriusXM Canada – ‘a monopoly cable company into the car,’ as one analyst describes it – has enjoyed a remarkable turnaround. (SiriusXM Canada)

At The Bell

Sirius XM expected to report stellar results Add to ...

When satellite radio broadcaster Sirius XM Canada Holdings Inc. reports its fiscal third-quarter earnings next week, shareholders should have reason to be upbeat.

The company, created in 2011 out of the merger of two formerly competing and profit-challenged operations – XM Radio Canada and Sirius Canada – is expected to report stellar results.

RBC Dominion Securities analyst Haran Posner is calling for revenue to rise 10.9 per cent over last year’s figures and EBITDA, a measure of cash flow, to soar 97.5 per cent, according to a recent research note to clients.

It isn’t every day that investors get the chance to buy into a business with projections of such rapid growth, and, not surprisingly, Mr. Posner has an “outperform” rating. His price target of $8.50 would be a nice advance from current trading levels and doesn’t include the 5-per-cent dividend payout, which is expected to rise further as the profits roll in. The shares closed Friday at $6.95.

Another believer is Stephen Takacsy, portfolio manager at Montreal-based Lester Asset Management, which specializes in value investing. “We look at the company as being sort of a monopoly cable company into the car,” Mr. Takacsy says, explaining its attraction.

He says the company is poised to become a free cash flow machine that should reward investors over the long haul. “I just view this thing as gushing with cash for years and years to come and paying it out to shareholders.”

The extent of the Sirius turnaround story isn’t well appreciated by investors, even though the stock has nearly doubled over the past year. That increase has occurred as the company gained economies of scale from its merger, but it hasn’t exhausted the upside potential.

Four analysts follow the company, according to Bloomberg, and all of them have the equivalent of “buy” recommendations, indicating they believe the stock has more room to rally.

The nice thing about evaluating the relative merits of Sirius is that it’s possible to compare the company to Sirius XM Radio Inc., its similarly named U.S. parent and major shareholder. They’re basically in identical businesses, but there is a huge value gulf between the Canadian and U.S. operations.

Mr. Posner looked at the two companies and compared their enterprise value, a measure that includes the value of their stock and debt, against various metrics, and found the Canadian operation is far, far cheaper by every one.

The Canadian firm’s enterprise value per subscriber works out to $551. In the U.S., the figure is $1,106 (U.S.).

Sirius in Canada trades at only 3.2 times this year’s revenue, compared with the U.S. parent’s more expensive 5.8 times. The Canadian stock changes hands for 13 times this year’s EBITDA (earnings before interest, taxes, depreciation and amortization), the U.S. company, 18.8 times.

Basically, investors are saying the U.S. satellite radio service is worth about 50 per cent more than the Canadian one, a difference that seems excessive.

To be sure, the Sirius XM Radio in the U.S. is a far bigger company, but it makes little sense for it to be valued so much more richly.

There are two commonly mentioned investor concerns about Sirius XM Canada: The threat of competition from Internet streaming into cars, and the escalating royalty rates the Canadian firm must pay for content to its U.S. namesake. But investors may be overdoing it on the worry front.

Mr. Takacsy says Internet competition may not be as big a threat as feared because users will still have to pay for bandwidth, and the new technology may not be as user friendly as the car radio.

Royalty rates are unlikely to escalate sharply, given that Sirius in the U.S. won’t want to undermine its Canadian affiliate through an excessive fee grab. “I don’t see why the parent would choke off the child,” Mr. Takacsy said.

Sirius XM Canada does have a few catalysts that could drive the shares higher.

Mr. Posner forecasts free cash flow, or the money left over after the company reinvests in the business, will rise to 67 cents (Canadian) in fiscal 2015, from 19 cents in 2012. Because Sirius doesn’t require much money for capital projects and other investments, Mr. Posner expects much of this growing pile of cash will be returned to shareholders in the form of rising dividends.

Sirius also has $131-million in 9.75 per cent senior notes that can be redeemed a year from now, offering the opportunity to refinance at a lower rate. Mr. Posner said he expects the debt to be rolled over at “meaningful interest savings.”

A further kicker that could provide additional upside is an expansion of satellite radio into the used car market. Sirius currently sells primarily to new car buyers, but Mr. Posner says used vehicles are a big, potential growth opportunity “that remains largely untapped.”



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