Is the Sirius Story Still a Good One?

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

Everything and everyone has a story.  Although it may be true that some stories are unarguably more grand and exciting than others, no thing or person is without their own unique story.  One exciting thing about the business world is that corporations are no exception to this rule.  Each and every company in existence—past, present, or future—has had or will have its own story.  Many of those stories are evolving and taking shape as you read this post.
Some six months ago, I posted a general analysis of the financial narrative within the Sirius Story, but given the ever-changing nature of corporations and their financial performance, an update to my first synopsis is now called for.  As I did previously, I'll first highlight a few plots within the financial narratives of Sirius XM Radio (NASDAQ: SIRI) and its competitors, Pandora Media (NYSE: P) and Cumulus Media (NASDAQ: CMLS).  Specifically, I'll take a look at the change in each company's revenue growth and gross margins to see how successful the companies have been at not only generating revenue, but also at managing the corresponding costs to do so.  I'll also look at the change in each company's debt to equity ratio to see how financially stable they are, and the change in their return on equity to see if they’re adding value to shareholders.  Lastly, I’ll look at the change in their price to earnings and price to free cash flow ratios to see how well they're priced.
<table> <thead> <tr><th> <div> </div> </th><th> <div><strong>SIRI</strong></div> </th><th> <div><strong>P</strong></div> </th><th> <div><strong>CMLS</strong></div> </th><th> <div><strong>INDUSTRY</strong></div> </th></tr> </thead> <tbody> <tr> <td> <div>Rev. Growth (5 Yr. Avg.)*</div> </td> <td> <div>29.78% to 27.27%</div> </td> <td> <div>N/A</div> </td> <td> <div>13.70% to 24.50%</div> </td> <td> <div>-4.82% to 9.22%</div> </td> </tr> <tr> <td> <div>Gross Margin (5 Yr. Avg.)*</div> </td> <td> <div>56.80% to 59.70%</div> </td> <td> <div>N/A</div> </td> <td> <div>37.30% to 38.50%</div> </td> <td> <div>48.50% to 52.70%</div> </td> </tr> <tr> <td> <div>Debt to Equity (MRQ)*</div> </td> <td> <div>0.63 to 0.60</div> </td> <td> <div>0.00 (no change)</div> </td> <td> <div>10.04 to 10.64</div> </td> <td> <div><a>6.17 to 1.46</a></div> </td> </tr> <tr> <td> <div>Return on Equity (TTM)**</div> </td> <td> <div>151.61% to 146.41%</div> </td> <td> <div>-33.41% to -37.49%</div> </td> <td> <div>97.13% to -25.51%</div> </td> <td> <div>N/A</div> </td> </tr> <tr> <td> <div>Price/Earnings (TTM)*</div> </td> <td> <div>4.90 to 5.90</div> </td> <td> <div>N/A</div> </td> <td> <div>N/A</div> </td> <td> <div>118.20 to 7.50</div> </td> </tr> <tr> <td> <div>Price/Free Cash Flow (TTM)* </div> </td> <td> <div>26.40 to 51.50</div> </td> <td> <div>-110.70 to -291.50</div> </td> <td> <div>-0.20 to 3.60</div> </td> <td> <div>30.00 (no change)</div> </td> </tr> </tbody> </table>
*Data obtained from
**Data obtained from
The Sirius Story
As you can see from the above chart, the Sirius story (or at least the financial performance chapter) has lost some of its appeal.  To begin with, Sirius managed to fall off a bit with its previously dominant five-year average revenue growth performance.  Although still impressive, the fall is alarming when you consider that Cumulus nearly doubled its five-year average.  Sirius continues to impress within the gross margin and debt to equity arena, but is it enough to warrant your attention?  Even though Sirius slipped and dropped off slightly with its (still great) trailing twelve month return on equity, its P/E ratio increased.  While only a small increase in P/E, the Sirius P/FCF ratio drastically increased by a staggering 95%. In other words, the Sirius investment is getting more expensive, while its financial performance is getting more questionable.
I generally try to keep myself restricted to analyzing only the financial narratives of a company, but in this case it's worth mentioning the competitive landscape in which Sirius finds itself.  As noted above, Sirius is already losing some ground against its closest competitors, though it's still outperforming them.  The question is, then, for how long?  With up-and-coming competitors like Spotify (a personal favorite of mine) and various other internet-based radio/music companies entering the marketplace and offering lower cost and sometimes even free services, I'm interested to see how Sirius responds.  In my opinion, Sirius has to fight an uphill battle against the influx of new competitors offering free and low cost music/radio services, when its bread and butter is a subscription-based model (roughly 87% of Sirius' total revenue was subscription-based in its most recent 10-K).
Does Sirius have the capital and market experience to get and stay a step ahead of their competitors, new and old?  Sure they do.  The financial numbers displayed above are telling of such, despite the fact that they've fallen somewhat since my last post.  However, given the expensive price of Sirius' stock as represented by its P/FCF currently, it's not worth a buy.  In my opinion, you're paying too high of a price for a company with too much risk, in a highly competitive market.  They will undoubtedly be worth considering once their P/FCF comes down a bit and they prove themselves amidst the up-and-coming competition.  But until then, the Sirius Story deserves no spot on your investment bookshelf.

Despite Sirius XM 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 it -- and plenty of room for it to fall if things don't. Read all about Sirius in The Motley Fool's premium report. To get started, just click here now.

Matthew McMichen 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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