As Takeover Looms, is This Company Worth a Shot?

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

Sirius XM Radio (NASDAQ: SIRI) is up over 100% since the two satellite companies merged, Sirius and XM. With the stock up so much, is it really a good time to buy in? We think so. Sirius’ last quarter results broke records with respect to subscriber additions, where Sirius’ subscriber base was up 10% year over year. The pre-announcement of 3Q results showed that net subscriber additions came in 100,000 above estimates, at 446,000 subscribers.

Sirius trades below $3 a share, but has attracted notable investor Steven Cohen. Cohen and his firm SAC Capital took a serious interest in Sirius during 1Q when it upped its stake to almost 100 million shares. In 2Q Cohen added 14% to his position and now owns over 114 million shares—around 3% of Sirius’ outstanding shares. Other notable investors that each owned over 60 million shares at the end of June were John Griffin and Philippe Laffont—see all funds owning Sirius.

The biggest competitor to Sirius of late is Pandora Media (NYSE: P). Sirius is estimated to own around 70% of the market for auto music services, with Pandora being its stiffest competition for this segment. Pandora went public in mid-2011 but is since down over 30%. The company has seen less than stellar execution on advertising monetization, as well as a slew of competition coming to market. In the last month alone, both Facebook and Microsoft announced music services, not to mention the up-and-coming startup Spotify, which is considered the leader in the streaming music market. As well, there is speculation that Apple may license music for a custom radio service akin to Pandora’s.

Sirius should be safe from the recent music services announced by Microsoft (NASDAQ: MSFT) and Facebook (NASDAQ: FB). For one, Microsoft’s Xbox Music service will only be available on Microsoft platforms, while Facebook Music will not be a standalone service, but will rely on partnerships with other streaming services. Both of these features will be big hits for their respective companies, but we do not see any overlap into Sirius’ market. We appreciate Sirius’ singular focus on perfecting its satellite services and embracing its niche in the auto industry.

On the other hand, Facebook is struggling with monetization and may struggle to reach revenue growth targets. As a result, the company is attempting to add various features that might help make the company money. We see Facebook having enough initiatives that it isn't worried about Sirius. The same goes for Microsoft, which has a gambit of operations that range from mobile, social networking, computers, gaming systems and tablets.

In addition to battling other competitors, Sirius is also fighting a takeover from Liberty Media (NASDAQ: STRZA). Liberty owns interests in a variety of companies in the media industry, including Live Nation Entertainment. The company also took a 17% stake in Barnes & Noble back in late 2011. The takeover bid from Liberty includes an ongoing application to the FCC to take a more than 50% stake in Sirius, where the company currently owns just around 49.6%.

Worth noting is that as Liberty seeks to increase its share ownership; the company’s CEO has been downsizing his position quite noticeably. We generally take such consistent insider selling activity as a bearish sign, but in this case the uncertainty of the Liberty takeover and company fundamentals outweigh our concerns—especially since corporate governance may be a top focus of Liberty should they gain majority control.

Earlier this year Sirius upped their prices, which has resulted in higher average revenue per user numbers. Even amidst the price hike, the company’s churn rate has remained relatively in-line. Sirius revised subscriber targets upward and the company is expected to add 1.9 million and 1.7 million net subscribers in 2012 and 2013, respectively. The primary driver for the increase in subscriber base will be auto sales. We believe that auto sales will be strong as a rebound in the economy looks to be a possibility in the coming years. The big overhanging issue for the company remains to be Liberty Media’s appeal to take de facto control of the company.

However, it appears that Liberty will ultimately gain effective control of the company; the question becomes what will the impact for Sirius be? The comments from Liberty suggest a change of corporate governance and capital allocation. Based on strong fundamental growth and accounting for the near term uncertainly of the Liberty takeover, S&P placed a $3 price target on the company, versus its current stock price of around $2.80. We believe once the Liberty Media saga is finalized, the stock will have a more defined direction -- a direction that we believe will provide a boost to the stock price. The Liberty overhang is keeping the stock down and preventing the market from accounting for the potential uptick in auto sales and an increased subscriber base.

Know What You Own

Despite being one of the market's biggest winners since bottoming out three years ago, there is still some healthy upside to be had if things go right for Sirius XM -- and plenty of room to fall if things don't. Read all about Sirius in The Motley Fool’s brand new premium report. To get started, just click here now.


This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Facebook and Microsoft and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook and Microsoft. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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