Sirius satellite radio fi nancial analysis

[Pages:63]sirius satellite radio financial analysis

Date of Valuation: April 1, 2oo5

jennifer williams adam goldberg brett rockelmann chris capshaw chris lauer

goofj24@ adamgolfer@ brockelm@ttu.edu capy0327@ cjlauer24@

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table of contents

Executive Summary

Industry Overview and Analysis

Five Forces Model

5

Company Overview

Competitive Advantage Analysis

Formal Accounting Analysis

Identify Key Accounting Policies

11

Accounting Flexibility

Accounting Strategy Evaluation

Quality of Disclosure

14

Potential "Red Flags"

16

Undo Accounting Distortions

16

Ratio Analysis and Forecast Financials

Sirius Satellite's Financial Statement Ratio Overview

Liquidity Analysis

Profitability Analysis

Capital Structure Analysis

Sirius' Sustainable Growth Rate

Benchmark Analysis

Liquidity

23

1 5

8 10 11

13 14

17 18

19 20 21 22 23

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Profitability

25

Capital Structure

29

Financial Statement Forecasting

Sales Growth Rate Forecast

31

Liquidity Forecast

31

Profitability Forecast

32

Capital Structure Forecast

32

Income Statement Forecast

32

Balance Sheet Forecast

33

Cash Flow Statement Forecast

33

Forecast and Analysis Conclusion

Valuation Analysis

Method of Comparables Valuation

35

Cost of Capital Estimation

36

Sirius Variables

36

Annual Yield

36

Intrinsic Valuation Methods

Discounted Free Cash Flows

37

Discounted Dividends

38

Discounted Residual Income

38

Abnormal Earnings Growth

39

Altman's Z-Score

Summary of Valuations

References

Appendices

3.1 Ratio Analysis

45

3.2 Balance Sheet

47

3.3 Proforma Balance Sheet

49

3.4 Income Statement

51

3.5 Proforma Income Statement

53

3.6 Cash Flow Statement

55

3.7 Proforma Cash Flow Statement

57

4.1 Free Cash Flow Model

59

4.2 Residual Income Model

61

4.3 Abnormal Earnings Growth Model 63

Grade Allocation

31

34 35

37

40 41 43 44

65

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executive summary

Sirius Satellite Radio Inc (NASDAQ ? SIRI)

As of April 1, 2005

Business Summary Sirius Satellite Radio Inc is the hottest new company in terms of revolutionizing the way America listens to music, news, sports, and entertainment. Sirius earned $54.87 million in 2004, while producing a 413% increase from 2003. Sirius offers 120 digitalquality channels, including 65 channels of commercial free music to its ever growing audience of 1.24 million subscribers. Sirius's latest achievements include an exclusive agreement with Ford Motor Company and becoming the "official satellite radio partner of the NFL".

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Price (current): 52 Week High: 52 Week Low:

Volume: Subscribers: Market Cap: Shares Outstanding: Dividend: Yield:

Growth of $10,000

Stock: Sirius Satellite Radio Industry: Radio Index: S&P 500

$5.56 $9.43 $2.01 56,882,784 $1,240,000 $6,790,000,000 1,320,000,000 $0.00 0.00%

Figure 1: The chart above illustrates a company's growth of $10,000 over the past five years. It compares Sirius Satellite Radio to the radio industry and the overall S&P 500. The S&P is more stable because of the fact that there is diversification which allows for winners and losers. The radio industry is somewhere in between because it is a profitable business, but because of the fact that there are many threats and weaknesses, the various losers balance out the big winners. Sirius's growth started out on top, but then reduced quite rapidly before the introduction of the satellite radio. Once Sirius introduced satellite radio, its growth has rapidly increased each year, leaving it one step above its competition.

Financial Focus

Management Success: Return on Assets Return on Equity

Income Statement: Revenue Revenue Growth 12/03 - 12/04 Gross Profit EBITDA Net Income Earnings Per Share

Balance Sheet: Total Cash Total Debt Total Debt/Equity Current Ratio

Cash Flow: From Operations Free Cashflow

M=Millions of Dollars

Sirius Satellite Radio

(32.75%) (48.24%)

$54.87M 1499.00%

($73.90M) ($458.05M) ($587.09M) (0.58)

$528.68M $426.16M 0.396 3.457

($309.27M) ($337.32M)

XM Satellite Radio

(39.66%) (115.14%)

$194.80M 354.80%

($56.17M) ($306.85M) ($631.02M) (3.508)

$447.52M $702.65M 1.706 1.636

($123.62M) ($278.25M)

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price graph comparison of sirius (top) and xm (bottom)

Sirius

XM Figure 2: The graphs above represent three years in price documentation as well as volumes for both Sirius Satellite Radio and XM Satellite Radio. Sirius Satellite's daily stock price ranges from $0.39 to $9.48 over the past three years, while, XM Radios stock price ranges from $1.66 to $40.00. Although, Sirius has more volume than XM, XM Radio's stock price is worth more than Sirius'. Both companies have been steadily increasing in stock price and volume since 2002.

business overview Sirius Satellite Radio was incorporated on May 17, 1990 as Satellite CD Radio Inc. On November 18th 1999 the company changed their name to SIRIUS Satellite Radio Inc, which is the name under which the FCC license to distribute satellite radio was given to. Sirius Satellite radio currently offers over 100 of music, news, sports, talk, entertainment, traffic, weather, and children's programming to subscribers throughout the United States. Their primary source of revenue is through subscription fees, with most of their customers subscribing to Sirius Satellite Radio on either a monthly or a yearly basis. They also derive revenue from activation fees, advertising sales on nonmusic channels and the direct sale of Sirius radios, which are currently sold in over 6,500 retail locations around the nation. As of December 31, 2004, Sirius has had over 1.2 million subscribers and 375 employees.

Sirius Satellite Radio (Sirius) is a member of the broadcast and cable television industry. This industry contains companies such as Clear Channel Communications, but Sirius' main competitor is XM Satellite Radio (XM). Sirius provides customers with over 120 channels of commercial-free radio, ranging from sports and news to entertainment and music. Sirius also makes live interviews and musical performances available to their customers. Sirius's market cap is found to be $6.79 billion, in relation to XM, whose market cap is $5.83 billion. Sirius' high market cap can help the company grow into the dominant player in the industry.

Due to numerous legal restrictions, such as granting of an FCC license, and high fixed start-up costs, Sirius does not have to be concerned with the threat of new entrants into the broadcast and cable industry. This allows Sirius to focus on concerns with

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