LSXMB - Liberty Sirius XM: The NAV Discount Is Not All This Stock Has To Offer

2023-03-21 08:52:59 ET

Summary

• LSXMK has been consistently trading at a 30% discount to NAV and an imminent spinoff could unlock value. The LYV stake is an easily overlooked but extremely valuable segment.
• With recent market volatility, LSXMK is also trading at a steep discount when comparing market price to LYV and SIRI discounted cash flow.
• LYV and SIRI are two consumer monopolies that will continue to prosper, despite current macroeconomic setbacks.

Main Thesis

The Liberty SiriusXM Group ( LSXMK ) is confusing, so confusing that many investors don't even want to touch it. At a market capitalization of $9 billion, the stock is too cheap to ignore, and today's prices gives you not one, but two compounding consumer monopolies at value prices. The net asset value discount of 30% is enticing, but LSXMK tends to trade in lockstep with its main subsidiary, Sirius XM Holdings ( SIRI ) at a consistent discount. The other assets attributed to LSXMK are therefore ignored, with the 31% stake in Live Nation Entertainment Inc ( LYV ) being the most enticing. An impending spinoff of the LYV stake into a separate tracking stock could help unlock value, but even disregarding this the underlying assets are trading at value prices on a discounted cash flow basis.

LSXMK is a tracking stock that offers an 82% stake in SIRI, a 31% stake in LYV, a 3% stake in the Braves Group ( BATRK ), a 2% stake in the Formula One Group ( FWONK ) and some attributable Liberty Media debt. This debt can be visualized in the spinoff diagram below, with an estimated $2.6 billion of net debt being attributed to LSXMK and $920 million being attributed to the new Liberty Live Group tracking stock. Please note that total net debt for LSXMK is approximately $11 billion when SIRI's liabilities are accounted for. This diagram is helpful in visualizing the extra debt on top of the subsidiary that LSXMK shareholders incur.

The FWONK and BATRK stakes will be settled and extinguished during the spinoff in a method to be determined, and do not add materially to LSXMK valuation calculations. That being said, investors should pay attention in the coming months to how LSXMK holders will be compensated for these intergroup interests following the spinoff. Since LSXMK trades at a consistent 30% discount from (or 50% upside to) NAV, further DCF valuation work is warranted to decipher whether the current LSXMK prices offer significant margin of safety. I am going to value the two spinoff segments individually, taking the extra Liberty debt into account. First up, Sirius XM.

Sirius XM

Sirius XM has offered disappointing 2023 guidance, with flat revenues of $9 billion projected and suspended guidance on subscribers. This all makes sense though, as it would be alarming if management was offering rosy guidance when the macroeconomic climate is deteriorating, and new car sales are the lowest they've been since 2011. Sirius XM is heavily dependent on offering free trials with new and used cars, with expected conversion rates of 30% and 20% respectively. Declining car sales as well as the lowest consumer sentiment in years will continue to weigh on discretionary spending in the near term.

With uncertainty, there is opportunity. Despite competition from the deep pocket music streaming industry, Sirius XM has demonstrated their ability to continue growing revenue and subscriber count during normal economic conditions, with revenue tripling and total subscribers increasing by 65% since 2011. Since 2013, the company has been able to grow their EBITDA by an average of 8%, down to 5% in the last 5 years and by a measly 1% from 2021 to 2022, coinciding with the worst new vehicle sales in a decade .

No analysis of Sirius XM is complete without a review of the 2019 Pandora acquisition , and unfortunately the results are not flattering. Unlike Sirius XM which can be considered a monopoly on the satellite radio business, Pandora faces immense direct competition from the likes of Amazon ( AMZN ), Apple ( AAPL ), Alphabet Inc ( GOOGL ) and Spotify ( SPOT ). Total music streams have decreased 50% since 2019, but Pandora has been able to maintain its paid subscriber count flat around 6.2 million and actually increase revenue by 20%. Despite overall abysmal results, it is encouraging that Pandora is developing a similar customer profile to SIRI's premium subscriber, pointing to potential synergies and bundling in the future.

Liberty Sirius XM Valuation

Considering the aforementioned weakened consumer and reduced car sales going into 2023, I estimate a modest decline in operating cash flow in 2023. Additionally, there will be increased capital expenditures in 2023 due to satellite build, with a free cash flow guidance of $1 billion for the year. After this, capex is expected to decline and then normalize into 2027.

With hopes car sales can recover in 2024, I anticipate SIRI will be able to return to 5% growth/year in EBITDA and this could translate to 3% growth in operating cash flow. I assumed a 10% cost of capital and used the DCF exit multiple method with an estimated EV/EBITDA of 14 which is near historical averages for SIRI. I projected $17 billion in net debt for the SIRI subsidiary in 2027 based on historic debt levels, with an extra $2.5 billion in net debt from the LSXMK parent company based on Liberty's spinoff documents. With these assumptions, 2027 EBITDA would be $3.2 billion, making the 2027 SIRI exit price $27.8 billion. LSXMK would receive $20.5 billion net of parent company debt which would need to be discounted to present value. I also assumed that this $2.5 billion in extra debt would cost LSXMK shareholders $100 million/year in interest expense. This is reflected in my model below:

This model suggests purchasing LSXMK offers over 80% upside from current market prices, when only taking into account the SIRI stake. Not a bad deal, but let's move on to LYV, which is the cherry on top.

LYV: An Underappreciated Stake

LYV controls an estimated 70% of the ticketing and live event venue market and operates in 57 countries. In fact, the company has come under recent regulatory scrutiny for monopolistic behavior following immense demand for Taylor Swift concert tickets on Ticketmaster. The merger between Live Nation and Ticketmaster in 2010 created a conglomerate that oftentimes both sells the tickets for and owns the arena at which a concert or other live event is taking place. Some may see this scrutiny as a risk, but I see it as sure profits for shareholders.

This vertically integrated consumer monopoly also has the free cash flow growth to back it up. The company has grown operating cash flows from $420 million in 2013 to $1.8 billion in 2022, with $283 million and $1.48 billion net of capex respectively. This is a 20% annual compounding growth rate on free cash flow! Of note though, this cash flow isn't always consistent and during the 2020 shutdowns the company lost $1.4 billion. Additionally, despite all the macroeconomic headwinds and the weakened consumer, live events seem to be an exception to this trend, with double-digit growth in ticket sales so far in 2023 compared to 2021 and 2022.

Liberty Live Group Valuation

LYV was able to grow EBITDA BY 8.5%/year on average prior to the 2020 disruption and grew cash flow from operations at a similar rate. Considering the monopolistic nature of the company, and the continued strength in sales despite macroeconomic headwinds, it is reasonable that the company can continue to grow operating cash flow and EBITDA at an average of 8.5% for the next 5 years. I assume the company will increase debt to $14.5 billion based on historic debt levels and EBITDA to $1.7 billion in 2027 and will trade for an exit multiple of 14x EV/EBITDA. This is on the conservative end of what it has traded for in the past. As we can see from the model, the debt load of LYV as well as the $920 million in debt attributable to the Liberty Live Group tracking stock weigh heavily on the valuation. I used a 10% discount rate as an estimated cost of capital and assumed modest increases in stock-based compensation and capex. This suggests the Liberty Live group is worth approximately $2.8 billion.

Total Valuation

With our DCF models suggesting the value of the new Liberty Sirius XM tracker being $16.2 billion, and the Liberty Live Group tracker being worth approximately $2.8 billion, buying LSXMK could give the investor approximately $19 billion of present value post spinoff. This suggests over 100% upside at the current LSXMK market cap of around $9 billion, or a price target of over $50/share.

Risks

Consumer spending: Both LYV and SIRI rely heavily on discretionary consumer spending, and if we have a protracted recession results may be much worse than estimates.

Coronavirus pandemic: LYV was affected adversely by the coronavirus pandemic, with severe losses due to restrictions on travel and large group events. If something similar occur in the future, severe losses can be expected again.

Tracking stock risks: Purchasing a tracking stock exposes the investor to the underlying performance of the parent company, which can have an adverse impact even if LYV and SIRI perform well. Additionally, I made the assumption that the parent company would not materially increase debt levels, which would adversely affect DCF valuations.

SIRI Competition: Despite Sirius and XM radio merging in 2008 to create a monopoly on the satellite radio business, there is heavy competition for listening time from streaming competitors such as AMZN, and from traditional AM/FM radio. Additionally, recent integration of Apple Car Play into new vehicles may further discourage use of SIRI's product and encourage use of music streaming competitors.

Spinoff risk: Despite the spinoff being designed to unlock shareholder value, spinoffs typically experience price declines in the short term due to indiscriminate selling. Additionally, there is no guarantee that the spinoff will occur at this point in time and is subject to regulatory approval, though management anticipates completion in the first half of 2023.

Conclusion

The combination of a 30% discount to net asset value and 100% upside suggested by our DCF models provides a good margin of safety for long term investors interested in two consumer monopoly type businesses. The imminent spinoff estimated to occur in the next 3 months may unlock value for shareholders in the near to medium term, as the stake in LYV is easily ignored and LSXMK tends to trade in lockstep with SIRI. The new LYV tracker will force the market to put a price on the stake, though it could trade down in the short term as spinoffs tend to be subjected to indiscriminate selling. Shrewd investors may also be interested in looking to buy the LYV tracker at a discount after the spinoff. The underlying companies do have many risks to future cash flow realization, with SIRI facing intense competition and both companies being reliant on strong consumer spending. Additionally, rising interest rates combined with the heavy debt loads of the companies may inhibit shareholder value realization. That being said, our models suggest an intrinsic value of over $50/share.

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