Lazard Capital Markets’ Barton Crockett initiated coverage of Sirius XM (NSDQ: SIRI) today with a “buy” rating and a $1.00 target — due in large measure to the way subscribers are accepting higher costs. The changed outlook overall for Sirius doesn’t hurt: “After surviving a close brush with bankruptcy in early 2009, Sirius XM has falling costs, more than 18.5M loyal subscribers accepting price hikes, entrenched growth via factory installs in most new cars, and limited debt maturities until 2013, when rising cash flow should make refinancing easy.”
Crockett is especially impressed, though, with the way Sirius managed to institute a 15 percent pay increase in Q309 by adding a lug for the fees for music rights without increasing its churn. That increase followed higher fees for second radios and online access. Since then, writes Crockett, “churn rates have improved, suggesting subscribers are very loyal and willing to pay higher rates. We see the music rights fee driving $52M of revenues in 2009 and $256M in 2010 …”
The company’s previous massive losses add another upside in the form of carryovers that should “shield” it from taxes for another decade or so. Risks include churn and the growth of online radio to car streaming. Not mentioned: the very real possible loss of Howard Stern when his contract is up.
With all the talk about the possible value of online news subscriptions and paywalls, it’s intriguing to see an analyst’s report about the value of loyalty to a different business. I’m not suggesting major parallels with the news business: Sirius XM starts with a head start of customer relationships because of the number trial subscriptions built in to new car sales and limited (although growing fast) alternatives for radio-based in-car music. But it’s a completely subscription-based business and merits a look, both for what it does right and what it may need to as other options increase.