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Sirius XM Earnings Preview: Great Progress, Can They Keep It Up?

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

In 2008, Sirius and XM merged to create Sirius XM Radio (NASDAQ: SIRI), which provides satellite radio service to about 23 million subscribers.  Around the time of the merger, there was rampant skepticism about the viability of satellite radio as a business, and some analysts and reporters were predicting the company’s imminent demise.  Bear in mind, this was during the same time period that all you heard from the financial news media was “the sky is falling!”  and other phrases to that effect.

As a result, stocks all across the market took a beating, and Sirius XM suffered more than most, trading as low as 5 cents per share in 2009.  I bought some at around 9 cents per share that year, and sold when it doubled to 18 thinking I had made a genius trade!  Since that time, however, Sirius has proven itself (for now, anyways) to be a viable company, turning a small profit beginning in 2010.  Now trading at around $3.15 per share, or 6200% above its low (wow!), investors are faced with a tough decision. 

While anyone who bought in anywhere near the lows would be silly to not take some profits off the table, is there an even brighter future for this stock?  With the company set to report earnings Feb. 5, investors might just get a better picture of where this company is heading.

Earnings and Revenue

Sirius was notorious for hemorrhaging money for many years (see below), and in several years, lost more money than there shares were worth.  However, with the company now profitable, will this company continue to grow its subscriber base and revenues over the coming years?

However people have felt about satellite radio as a business, there is no argument that Sirius XM has done a great job growing the popularity and subscriber base of their services.  Through factory-installation programs with almost all auto manufactures, the company has grown its OEM distribution channel tremendously. 

One revenue source not fully capitalized on is the company’s modest stream of advertising revenues, which Sirius XM has said it intends to improve on in the coming years.  Any discussion of this during the earnings call would be welcome news to shareholders.  At any rate, the company has done a great job of growing its revenues, from less than a million dollars in 2002 to almost $4 billion annually now.

Competition

Aside from terrestrial radio, whose popularity has been on a steady decline for years, the most serious threat to satellite as a business, in my opinion, are internet radio services such as Pandora (NYSE: P). With the growing popularity of smartphones and other mobile devices, it is easy to simply plug my iPhone into my car stereo and open the Pandora app. 

While I believe satellite is a great deal at only $12.95 per month, especially considering the variety of programming, free always sounds better to a lot of people.  Until Sirius XM proves me wrong, I actually think Pandora makes more sense as an investment right now.  Since 2009, Pandora has been steadily beefing up their balance sheet, currently with around $100 million in cash and virtually no debt.  Also, after just a few years in business (as compared to a decade for Sirius), Pandora is forecast to break even this year, and to become profitable beginning in fiscal year 2014. 

Financial Health

After years of accumulating debt, Sirius XM finally seems to have it under control.  From the period between 2003 and 2011, the company’s long-term debt increased from $195 million to $3 billion; however this has since decreased to $2.4 billion as of the most recent quarter.

Also worth noting is the $2 billion share buyback plan that was just announced in December.  This is generally a good sign of financial stability and health in a company.

Another issue, not really financial “health” –related, but pertaining to the control of the company, is Liberty Media’s (NASDAQ: LMCA) recently announced majority (50.7%) stake in the company.  This effectively gives Liberty control over Sirius XM.  I don’t believe this is a major cause for concern, but I am certainly interested to hear what the company has to say on this matter during the call.

On that note, Liberty might actually be the best way to play Sirius XM for long term investors.  You get exposure to Sirius while benefitting from Liberty's more established businesses, such as their significant stakes in LiveNation and Barnes and Noble, as well as investments in Verizon and Time Warner.  Liberty's holdings are a nice blend of established, stable companies and speculative plays like Sirius.  

Conclusion

If Sirius XM is going to continue to command the high valuations of a rapidly growing company, they need to demonstrate that they have a plan to rapidly grow earnings, not just revenues.  Sirius XM currently trades for 35 times 2012’s earnings, which using my rule of thumb that P/E should be no more than twice the annual earnings growth rate of a company, Sirius needs to grow its earnings by 17.5% annually in order to justify this.  To this point, more important than the actual numbers for 2012 are the company’s outlook to the future and its plan to grow for years to come. 


KWMatt82 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

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