Sirius XM Keeps Outperforming

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Sirius XM Radio (NASDAQ: SIRI) operates satellite radio systems and has more than 21 million subscribers. The company offers more than 135 channels of quality music, news, and talk shows. Programming includes the National Football League, Major League Baseball, and college games, as well as talk shows featuring hosts Howard Stern, Martha Stewart, and Oprah Winfrey. Sirius XM has equipment alliances with several automakers; it also sells satellite radio equipment through its website and through such retail outlets as Best Buy and Wal-Mart.

The stock has been volatile throughout the year; however, Sirius XM will end the year with substantial gains. It has made a remarkable recovery from being on the verge of being bankrupt to one of the leading players in the market. Recently, the stock has shown an extraordinary surge due to the increase in institutional ownership. There are other catalysts as well for the company, which we will discuss later on in the article.

Better than expected Copyright Royalty Board rates

On Friday, the copyright royalty board announced its new statutory royalty rates for the radio station. The board set the rates at 9% of gross revenues for 2013; 9.5% for 2014; 10.0% for 2015; 10.5% for 2016 and 11.0% for 2017. These new rates will deliver more revenue to record labels and performing artists. At the moment, Sirius XM pays 8% of gross revenue in royalties. Furthermore, the CRB set the statutory royalty rates for pre-existing subscription services, such as Music Choice at 8% of gross revenues for 2013 and 8.5% for 2014 through 2017.

Although the rates increased, the affect on the stock price was positive, and shares of Sirius XM went up by 7%. The market expected the board to set the rates higher than these levels. CRB set the rates quite high at 13% of gross revenues in 2008, but reduced to 6%-8% after they realized it can have a destabilizing effect on the company. There were fears that the company may have to pay between 13%-20% of gross revenues in royalty.

Solid Financial Position

Sirius XM is in a strong financial position at the moment. The company had $556 million in cash and cash equivalents at the end of the third quarter. In addition, Sirius has eliminated $1.6 billion of long-term debt and its debt to equity ratio currently stands at 0.58, lower than the industry average of 3.1. Free cash flows are also solid for the company; it generated $439 million during the first nine months of the year. Currently, long-term debt of the company stands at $2.34 billion. However, the company has announced a special dividend due on Dec. 28 that will reduce its cash balances.

Share repurchase, Change of CEO and improving auto sales

Share repurchases will prove to be another catalyst for the stock. The company will repurchase $2 billion worth of shares; however, timing and magnitude of the share repurchase has not been determined. The company can fund the share repurchase through its discretionary cash flows and periodic borrowings. Moreover, the CEO Mel Karmazin will step down in February 2013. Sirius management has been wise in its decision making, and the change of CEO will most likely be positive for the company. Furthermore, recovering auto sales are hugely encouraging for the company, and are expected to continue during the next year, which should allow the company to enhance its revenues. There will also be a 12% price increase due to the subscriber contract expiry. As a result, the company should be able to maintain its growth during 2013.


The main competitor for Sirius is Pandora Media (NYSE: P), but there are also two small competitors in the shape of Cumulus Media (NASDAQ: CMLS) and Saga Communications (NYSEMKT: SGA)

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>SIRI</strong></p> </td> <td> <p><strong>P</strong></p> </td> <td> <p><strong>CMLS</strong></p> </td> <td> <p><strong>SGA</strong></p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>5.8</p> </td> <td> <p>N/A</p> </td> <td> <p>31.5</p> </td> <td> <p>12.40</p> </td> </tr> <tr> <td> <p><strong>P/B</strong></p> </td> <td> <p>3.7</p> </td> <td> <p>13.90</p> </td> <td> <p>1.40</p> </td> <td> <p>1.90</p> </td> </tr> <tr> <td> <p><strong>P/S</strong></p> </td> <td> <p>6.00</p> </td> <td> <p>3.70</p> </td> <td> <p>0.40</p> </td> <td> <p>1.60</p> </td> </tr> <tr> <td> <p><strong>EPS Growth</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>N/A</p> </td> <td> <p>N/A</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p><strong>Operating Margin</strong></p> </td> <td> <p>24.70%</p> </td> <td> <p>-8.20%</p> </td> <td> <p>17.40%</p> </td> <td> <p>22.90%</p> </td> </tr> <tr> <td> <p><strong>Net Margin</strong></p> </td> <td> <p>102.90%</p> </td> <td> <p>-8.30%</p> </td> <td> <p>1.30%</p> </td> <td> <p>12.60%</p> </td> </tr> <tr> <td> <p><strong>ROE TTM</strong></p> </td> <td> <p>142.00%</p> </td> <td> <p>-29.90%</p> </td> <td> <p>4.60%</p> </td> <td> <p>16.80%</p> </td> </tr> <tr> <td> <p><strong>Debt to Equity</strong></p> </td> <td> <p>0.50</p> </td> <td> <p>0.00</p> </td> <td> <p>8.10</p> </td> <td> <p>0.60</p> </td> </tr> </tbody> </table>


Sirius XM trades at a discounted P/E ratio compared to its competitors. However, the company has higher P/B and P/S ratios than its competitors. On the other hand, Sirius XM beats all of its competitors in margins and ROE. Operating and net margins are extremely impressive, and the ROE of 142% is the highest in the industry.


Sirius XM's business model is stabilizing, and there are a lot of growth opportunities in the market. As I mentioned above, recovering auto sales and a 12% price increase will help the company maintain its growth over the coming year. The company is performing marvelously, and the growth in subscribers is remarkable. Sirius XM is an extremely attractive long-term investment and is likely to keep rewarding its investors handsomely.

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