Sirius is Getting Serious About Its Stock

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

Sirius’ (NASDAQ: SIRI) stock has risen by 85.5% in the last 12 months and 31% since December of 2012, which is when Sirius announced its stock buyback program. Whether or not the buyback program has anything to do with its recent run-up in price, the particular characteristics of the company make the program very interesting for retail investors in the future.

Sirius`s Ownership Structure

Sirius XM Radio is in the broadcasting business. It broadcasts all types of news, sports, music, weather and entertainment, much of it over the internet, to paid customers in the U.S., of which there were more than 23 million at the end of 2011. Its market capitalization is $22.3 billion and its P/E is 7. In the first quarter of 2013 its net profit margin was 13.77% and its operating margin was 27.52%, while for 2012 those figures were 102.88% and 21.33%, respectively.

Buyback Program

Sirius announced a buyback program amounting to $2 billion, which, as a percentage of Sirius’s capitalization, is almost 10%. What makes Sirius’ buyback program particularly interesting, though, is its ownership structure. Liberty Media owns half of Sirius, and another 30%, equivalent to $6.5 billion, is owned by institutional investors. That leaves only $4.5 billion available to retail investors.

Competition

CBS Corporation (NYSE: CBS) is a mass media company broadcasting a variety of entertainment, news and sports programs, as well as having the most viewed television network in the U.S.

It has a market capitalization of $30 billion and its P/E ratio is 18.4. CBS’ stock price has recovered remarkably well from the lows of $3.88 at the depth of the recession to reach $49.18 at present.  It is certainly in an older, steadier market than Sirius or Netflix, and this means less innovation but steady returns.  Since 2009, CBS has had a steady climb in net income each year--it went from $227 million in 2009 to $1,700 million in 2012.  Of course, CBS competes in with Sirius over content and viewers, but the two companies have quite different models--Sirius is proud to have no advertising, whereas CBS is basically an advertising company. 

Netflix (NASDAQ: NFLX) provides movies and TV shows through an internet subscription. Like Sirius, it follows the no-advertisement and paid content model.  It has a market capitalization of $12.46 billion and a P/E ratio of 532.21. Its net profit margin for the first quarter of 2013 and for 2012 is below 1% and its operating margin for the same periods is below 2%. Its revenue in the 1st quarter 2013 of $1.02 billion is only $154 million greater than 1st quarter 2012 revenue of $0.87 billion, while its profit margins have been barely positive and essentially flat for the past year.

Conclusion

Because of Sirius’s ownership structure, its buyback program has a much greater impact since it represents about 44% of its available float. Although the program has already started, it seems that most of its stock has not yet been bought back, so that most of the purchase will be done over the coming year. That means that there will be a guaranteed demand for a very large percentage of its available float.

CBS’s P/E ratio of 18.4 may signal that it has peaked, considering the steady and uninterrupted rise in its stock price since early 2009. It doesn’t have any particular claims to be an especially attractive value, either in terms of innovation or other considerations, such as insider buying or buyback scheme.

Netflix is the quintessential growth stock. Its fundamentals, as evidenced by its revenue growth and profit margins, don’t justify its present valuation. Its P/E of 532 reflects that reality. Its attraction resides in being a pioneer in the provision of entertainment via the internet. Perceptions of the company ride on whether or not it will be able to capitalize on the opportunity.

Sirius seems to be a safer bet, especially in the short run. Such a guaranteed large purchase of available stock gives investors at minimum a floor, and more likely a significant upside, as the out-sized demand will tend to push up its price.

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Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. 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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