Lehman Report and rationale for 12 month $39 price.
Headline: CD Radio: Initiating Coverage With A 1-Buy, Part 1 of 2 Author: Tim Wallace 1(212)526-5131 Rating: 1 Company: CDRD Country: INI CUS Industry: BROCTV Ticker : CDRD Rank(Prev): 9-Not Rated Rank(Curr): 1-Buy Price : $19 52wk Range: $25-3 Price Target: $39 Today's Date : 11/24/97 Fiscal Year : DEC ------------------------------------------------------------------------------ EPS 1996 1997 1998 1999 QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr. 1st: -0.06A - -0.05A - - - - 2nd: -0.07A - -4.23A - - - - 3rd: -0.07A - -0.80A - - - - 4th: -0.11A - -0.30E - - - - ------------------------------------------------------------------------------ Year:$ -0.29A $ - $-5.00E $ - $-1.90E $ - $-4.53E Street Est.: $ - - $ - - $ - - $ - - $ - - $ - - ------------------------------------------------------------------------------ Price (As of 11/24): $19 Revenue (1997): $0 Return On Equity (97): N/A Proj. 5yr EPS Grth: N/A Shares Outstanding: 15.8 Dividend Yield: - - Mkt Capitalization: $300 Mil. P/E - -; - - : N/A; N/A Current Book Value: N/A Convertible: - - Debt-to-Capital: N/M Disclosure(s): A,C ------------------------------------------------------------------------------ * We are initiating coverage with a 1-Buy rating
* CD Radio offers subscribers a 50 channel satellite delivered radio service with 30 channels of commercial-free, CD quality digital music and 20 channels of news and information. It is scheduled to be available by Christmas 1999.
* Strong consumer demand is forecast by several independent market research firms with penetration levels of more than 16% by 2005. We estimate that CD Radio could have 1.2 million subs paying $10/month by the end of year one.
* Several important milestones including selection of a equipment manufacturer and programming deals should propel the stock higher over the next two years.
* Our 12 month price target is $39 based on a discounted cash flow model which assumes a 30% discount rate, a 10x terminal multiple, and half the penetration rates forecast by independent industry experts. ------------------------------------------------------------------------------ INVESTMENT OPINION
We are initiating coverage of CD Radio with a 1-Buy recommendation. Our 12 month price target is $39 based on our discounted cash flow model. The company recently completed simultaneous equity and debt financing, issuing 2.8 million new shares of common stock and $125 million in High Yield bonds priced at 15%. Lehman Brothers participated in both offerings.
Satellite radio represents a new frontier in audio entertainment. CD Radio, a pioneer in satellite delivered radio, is expected to begin offering service by Christmas 1999. Plans call for a subscription-based digital radio service offering listeners 30 channels of commercial-free music and 20 channels of talk and information. Like cable networks, CD Radio will present niche formats like opera, blues, and symphonic music generally unavailable in most markets on conventional radio. Furthermore, CD Radio's service, since it will be broadcast digitally, should be crystal clear, CD quality sound, a distinct product attribute for early-adopter audiophiles. And finally, CD Radio's proprietary technology allows the company to deliver this unique service to automobiles and other out-of-home locations, the primary environment for radio use.
We think the potential market for CD Radio is enormous. There are approximately 200 million addressable vehicles in the U.S. Even if the primary market is only commuters, this represents roughly 110 million vehicles daily. Of this group, approximately 87% listen to radio with roughly 80% of this subset primarily tuning-in to music stations. This implies roughly 75-80 million commuters who represent CD Radio's initial target audience. Moreover, there are approximately 45 million people living in primarily rural markets with fewer than 5 radio stations playing music. We think this is also a prime target for CD Radio service.
With commute times increasing and commercial radio offering a limited number of music formats in most markets, we think CD Radio offers listeners a compelling alternative. Independent market research supports our expectations. According to several polls, consumer demand for satellite radio service is strong. For example, the Yankee Group found that approximately 35% of its large sample poll of 2,000 people expressed significant interest in a commercial-free, radio service costing $10 per month with initial equipment cost totaling $200. To put this statistic in perspective, consumer interest in DirecTV prior to service availability was roughly 10%. The Yankee Group is forecasting penetration rates for satellite radio of more than 16% of total registered vehicles, or approximately 32 million, by the fifth year of service.
From a technology perspective, CD Radio's proprietary delivery system is capable of broadcasting a high quality digital signal to automobiles. Significantly, CD Radio has produced prototype equipment that uses off the shelf technology making production by an electronics equipment manufacturer both inexpensive and less risky. The company, however, does have patents on the system configuration that we believe is a distinct competitive advantage over the other satellite radio license holder.
Once the service becomes available, demand can be quickly satisfied by the company's plug and play system. By using a radio card and a peel and stick antenna dish, subscribers can install the equipment themselves and begin receiving the service almost instantly. We think this is a crucial factor in the ramp up of CD Radio subscribers. A radio card receiver fits easily into either a cassette slot or CD changer in the car. A silver-dollar sized antenna which is battery powered and transmits a wireless signal to the receiver can be stuck to the rear window of the car without costly wiring or garage time for installation. The service can be turned on or off remotely, allowing the subscriber to receive CD Radio almost instantly.
Since the FCC only issued two satellite licenses, competition will be limited. Moreover, CD Radio has been working on its business plan for at least seven years and we believe they are much further along on marketing and technology issues. Key executives are already in place, launch dates are set, and equipment manufacturers are soon to be announced for CD Radio's system. We think there is a first to market advantage that will be captured by CD Radio.
Prior to the launch of service in late 1999, we think there will be several important milestone announcements that should drive higher stock prices. Over the next few months, we are anticipating CD Radio to announce selection of an electronics manufacturer to produce the plug and play radio card tuner and satellite dish. Over the next 12-18 months, CD Radio will begin building-out its terrestrial repeater system in the top 40 markets which is designed to eliminate line of sight problems caused by large buildings in downtown urban areas. As each market is completed, we anticipate growing investor demand for CD Radio shares. And finally, as the company signs up new content providers like Bloomberg, CNN, etc., we would expect the stock to further strengthen.
A full report on CD Radio will be available shortly.
See part 2 for valuation and estimates
------------------------------------------------------------------------------ Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. B-An employee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company. G-The Lehman Brothers analyst who covers this company also has position in its securities.
Headline: CD Radio: Initiating Coverage With A 1-Buy, Part 2 of 2 Author: Tim Wallace 1(212)526-5131 Rating: 1 Company: CDRD Country: INI CUS Industry: BROCTV Ticker : CDRD Rank(Prev): 9-Not Rated Rank(Curr): 1-Buy Price : $19 52wk Range: $25-3 Price Target: $39 Today's Date : 11/24/97 Fiscal Year : DEC ------------------------------------------------------------------------------ EPS 1996 1997 1998 1999 QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr. 1st: -0.06A - -0.05A - - - - 2nd: -0.07A - -4.23A - - - - 3rd: -0.07A - -0.80A - - - - 4th: -0.11A - -0.30E - - - - ------------------------------------------------------------------------------ Year:$ -0.29A $ - $-5.00E $ - $-1.90E $ - $-4.53E Street Est.: $ - - $ - - $ - - $ - - $ - - $ - - ------------------------------------------------------------------------------ Price (As of 11/24): $19 Revenue (1997): $0 Return On Equity (97): N/A Proj. 5yr EPS Grth: N/A Shares Outstanding: 15.8 Dividend Yield: - - Mkt Capitalization: $300 Mil. P/E - -; - - : N/A; N/A Current Book Value: N/A Convertible: - - Debt-to-Capital: N/M Disclosure(s): A,C ------------------------------------------------------------------------------ ------------------------------------------------------------------------------
VALUATION
Our 12 month price target of $39 per share is based on a discounted free cash flow model. Our model makes the following assumptions; 1) total satellite radio industry penetration of registered vehicles beginning in 2000 of approximately 1% and escalating to 8.5% by 2006, 2) CD Radio captures 50% of total satellite radio subscribers, 3) a discount rate of 30% applied to our annual free cash flow per share estimates, 4) a 10x terminal multiple applied to our estimated 2006 EBITDA, and 5) fully diluted shares of 29.8 million which includes both in the money and out of the money options.
DCF MODEL
Discount Rate 30% Terminal Multiple 10x
1998 1999 2000 2001 2002 2003 2004 2005 FCF/sh estimates ($6.72) ($9.27) ($4.34) $1.42 $4.96 $8.81 $11.31 $14.31
Terminal Value/sh $268.30 (Net Debt)/Cash/sh 18.72
Total FCF/sh ($6.72) ($9.27) ($4.34) $1.42 $4.96 $8.81 $11.31 $301.33
Fully Diluted Shares 29.8M
12 month price target $39
FINANCIAL ESTIMATES 1997 1998 1999 2000 2001 2002 2003 2004 2005 Ttl vehicles - - 200 202 206 210 214 219 223 Sat. Radio Pen. - - 0% 1.2% 2.3% 3.5% 5.0% 6.5% 7.7%
Ttl sat. Radio subs - - 0 2.5 4.7 7.4 10.7 14.2 17.1 CD Radio subs - - 0 1.2 2.3 3.7 5.4 7.1 8.5
Revenues $0 $0 $0 $88 $220 $364 $544 $743 922 Y/Y % chg na na na na 151% 66% 49% 37% 24%
EBITDA (7) (10) (28) (16) 90 188 343 516 673 Y/Y % chg na na na na na 109% 82% 51% 30% margins na na na na 41% 52% 63% 69% 73%
Net interest exp. 4 11 7 (73) (79) (77) (77) (20) 13
EPS ($5.00)($1.90)($4.53) (5.19)($1.47) $1.96 $7.28 $9.85 $12.92
------------------------------------------------------------------------------ Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. B-An employee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company. G-The Lehman Brothers analyst who covers this company also has position in its securities. |
