Sirius XM: Moving in the Right Direction

Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sirius XM (NASDAQ: SIRI) is one of the most widely followed stocks in the market. Since its dip in 2008, the stock made a remarkable comeback. Sirius XM shareholders gained about 65% in this year alone. I still think that the stock is a cheap deal. In this article, I dig deeper into recent financials to support my bullish thesis.

Current financials

Sirius XM presented a very strong Q3 for shareholders, with record levels of revenue, 446,000 net subscriber additions, and double-digit growth. Sirius XM Radio reported Q3 revenue of $867 million. Net income for the Q3 of 2012 stood at $75 million after debt extinguishment charge of $107 Million. Sirius XM produced adjusted EBITDA of $245 million, up 24% from $197 million in the Q3 of 2011.

Third quarter results were better than predicted with EPS of $0.03, in comparison to consensus estimates of $0.02 per share. The company's other metrics for Q3 demonstrated a business model that involves a stabilized churn rate and growing conversion rates. Strong subscriber growth is predicted to continue for fiscal 2012. Recently, the company released guidance suggesting an overall 1.8 million net subscribers for the year, up from earlier estimates of 1.6 million. In addition, revenue guidance was also raised following the third quarter earnings announcement, approximately $3.4 billion from $3.3 billion. The company is expecting to translate revenues into $700 million of free cash flow.

Cash flows

The company has generated more free cash flow in the initial nine months of fiscal 2012 than in any full year "in its history." Sirius XM used this cash to decrease debt to its lowest level since the combination of Sirius and XM. Free cash flow grows to record level. Free cash flow was $195 million in the third quarter of 2012, an improvement of 159% from the $75 million recorded in the third quarter of 2011. Sirius XM ended the quarter with $556 million of cash.

Sirius XM has a robust cash flow profile, which should aid in sustaining its share buyback program. Free cash flows for the fiscal 2012 should come in about $700 million and are predicted to reach $900 million in 2013. This represents around 30% of the corporation's total debt balance of $2.5 billion. Sirius XM continues to generate an outstanding growth in cash flows, thanks to its higher and stable vehicle consumer conversion rate, as well as increase in subscriber additions.

Dividends and share repurchase

Sirius XM declared that its board of directors has authorized a $2 billion share repurchase program. Liberty Media (NASDAQ: STRZA), the beneficial owner of around 49.8% of the corporation's stock, will participate in the share repurchases on a pro rata basis. Sirius XM will finance the repurchases by cash on hand, borrowing under its revolving credit facility and future cash flow from operations.

The board of directors also announced a special cash dividend of $0.05 per share. The decision to pay out dividends comes after the firm announced that it had moved into a $1.25 billion credit facility. The company will utilize this cash to finance its working capital demands and share repurchases. Sirius XM is now in a position to start returning capital to its investors without damaging its credit profile. The company retired over $850 million of its debt in the Q3 of 2012 and ended Q3 with $556 million in cash.

Competition

SiriusXM main industry peers are Pandora Media (NYSE: P)Cumulus Media (NASDAQ: CMLS), and Saga Communications (NYSEMKT: SGA).

 

Market Cap (in millions)

Net Income (in millions)

5 yr rev CAGR %

D/E

SiriusXM

15,152

3387

36.5

0.5

Pandora Media

1,610

-31

-

-

Cumulus Media

470

39

10.4

8.1

Saga Communications

209

16

-2.2

0.6

Source: Morningstar.com

Pandora Media is down almost 40% since its 2011 IPO. The company is seeking to enter the auto market by providing streaming radio services in new vehicles. With Sirius XM owning nearly 70% of the market share for new car sales in the U.S., I would not look at Pandora as a tremendous threat for now.

Cumulus Media is a small player that trades at the cheapest forward P/E of the four stocks outlined here. Cumulus Media is down almost 20% year to date after some massive earnings misses. The company now trades at the bottom end of the sector at 2.9x cash flow.

Saga Communications is one more small-cap radio station. Saga is predicted to grow five-year EPS at only 2% annually. The company did manage to pay a special dividend just lately of $1.65, nearly a 3.5% yield for investors.

Foolish summary

I am excited about the increase in subscriber guidance to 1.8 million net additions that the company reported earlier this month. I believe the company will continue to grow in the fourth quarter. Sirius XM continues to make investments across its business, mainly in R&D, infrastructure, customer care, and programming. In addition, the company is also investing in new businesses, such as the telematics service that was announced in the third quarter with Nissan. I believe these investments will reward shareholders in the years to come. The stock has made a remarkable comeback in recent years, but it still has a long way to reach its pre-Lehman valuation.

 


ecofinstat has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure