Sirius: Many Reasons to be Bullish
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I have been watching the stock price of Sirius (NASDAQ: SIRI) for years. There were a number of things keeping me from purchasing the stock, from its high volatility, debt, or even low earnings. However, the company has taken some steps to make itself a little more attractive these days. The stock has traded around $0.50 a few years ago, and is now all the way in the low $2’s per share. Over the last year, the stock has seen an increase of about 10%. Currently, the stock has a beta of 1.34, making it more volatile than the market. Earnings per share of $0.07 give the stock a price to earnings ratio of 31.80. Even though this number seems high based on normal standards, it is actually less than the industry average of 40.9. Some of the competitors in the media industry worth reviewing are Walt Disney (NYSE: DIS), World Wrestling Entertainment (NYSE: WWE), and direct competitor Cumulus Media (NASDAQ: CMLS).
After getting hit hard in the third and early fourth quarter of last year, Disney’s stock has increased in price about 30%. However, over the last 12 months, the stock is near the same price it was previously, around the low $40’s per share. Recently, Disney announced a partnership with Starbucks to place coffee shops in Disney theme parks. I think this partnership will work well for both companies. One area of concern for Disney is the company’s film studio chief Rich Ross stepped down stating that the job was no longer the right professional fit for him. No successor has yet been named. How this will ultimately affect the company is not known at the moment, but it whether it will depends on who the successor will be.
I will admit that I am a fan of WWE’s product. However, the stock is a completely different story. Over the last 12 months, the stock has lost about 30% of its value. A year ago, the company cut its dividend by about two-thirds. This was done to have the dividend fall in line with the company’s earnings. Even today, there is a possibility the dividend could be cut again as the company’s dividend payout is higher than its free cash flow. In addition, the company has very little growth with 5 year annual revenue growth of only 3.9%. The company’s biggest hope for continual growth in earnings is the company’s plan for the WWE Network. The channel will be devoted entirely to wrestling, and with the amount of footage in WWE’s library, there is more than enough to fuel the channel for a long time. If the company does not do something about stagnant earnings, then I fear the dividend will be in trouble. If that happens, then the stock price will fall even lower than its current level.
Cumulus Media is a direct competitor to Sirius and has had an up and down year. Over the last 12 months, the company has lost roughly 20% of its share’s value. Even though Cumulus is not as big as Sirius, the company shouldn’t be taken lightly. The company posted a profit of $63.9 million in 2011, thanks to a boost from the acquisitions of Cumulus Media Partners and Citadel. The purchase of Citadel Broadcasting was a deal worth $2.4 billion that gave Cumulus a total of 572 radios stations spanning almost 120 U.S. markets. A possible concern for Cumulus is a pending dispute between the company and former employee Paul Finebaum. A county judge has given the two parties until the end of May to resolve the dispute, both suing the other for “contractual violations”. If the two are unable to come to an agreement, the judge will need to mediate which could lead to problems for the company. Although the company does have a low price to earnings ratio, I typically try to stay away from a company that has any pending litigations.
One of the reasons I like Sirius is because of Howard Stern. Whether you like him or hate him, his show is controversial and he is a huge reason many new subscribers come on board. He may not be the reason they stay, but getting that new subscription is half the battle. One of the other reasons I am bullish on the company is because of the increased exposure it is receiving. With so many cars now being equipped with satellite radio, the business will just grow. As these stocked cars are sold as used, the new buyer then becomes a potential new customer for Sirius. The company currently converts roughly 45% of new car buyers into subscribers of its service. As the number of cars increase with an improving economy, Sirius increases the number of new subscribers. To help Sirius get new subscribers through pre-owned vehicles, the company announced a partnership with Asbury Automotive Group. According to a press release, there will be over 4,000 dealerships that will participate in the program. This is only going to help the company continue to grow.
Personally, I am bullish on the company. In the short term, I think the company will continue to expect some of the volatility it has seen in the past. However, in the long term I see the stock going up. Analysts have Sirius at a mean target price of $2.57. If the stock was to reach this level, it would be a 20% increase and a new high, from where it is currently at. For anyone who has thought about buying the stock but not sure when to get in, now may be a good opportunity.
StockCroc1 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.