Is Now the Time to Get Serious on Sirius XM?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Occasionally, we writers get a little full of ourselves. When that happens to me, I write something on Sirius XM Radio (NASDAQ: SIRI), and then a couple of days later I read the comments. Nothing brings you back to earth like a few dissed Sirius Kool-Aid drinkers.
Okay, I may be a tech moron. But I can’t for the life of me understand why anyone would subscribe to Sirius XM Radio and pay upwards of $14 a month for the privilege, unless you just can’t live without Howard Stern. I for one can thrive without him! With so much free content available and the ability to plug your MP3 into your car radio to listen to exactly what you want, I find myself at a loss as to why Sirius remains in business. Why it hasn’t gone the way of the 8-track is beyond me. Okay, so now you know how I feel. That said, Sirius recently implemented a subscription price hike without so much as a whimper from its customers. Did you hear that Mr. Hastings?
Putting personal opinions aside, let’s look at the company’s fundamentals. Sirius has a market cap of just over $7 billion and trades at around $2 per share. Trailing twelve month P/E is 23.38, and the PEG ratio is 1.12. Not bad. Price to book is a bit disconcerting, reported at 8.28. Return on equity is a remarkable 79.54%, and quarterly year-over-year revenue and earnings growth are also strong, coming in at 11.2% and 38% respectively. The debt to equity and current ratios are 348.01 (Ouch!) and 0.60, respectively. Sirius pays no dividend.
Much as I am loathe to admit it, Sirius may be headed in the right direction. The second quarter report will be critical. Revenues should continue to grow, if for no other reason than the 12% January subscription rate increase. Existing subscribers were grandfathered in. So, as these subscriptions renew at higher rates, it isn’t unreasonable to conclude that revenues will continue to increase throughout the year. Another positive catalyst is the surge in U.S. new car sales, up some 12% in the first quarter. Sirius provides 3 free months of service to about 60% of these new car buyers, and it is reported that 46% of them continue their subscription to Sirius XM Radio. Sirius has teamed up with Penske Automotive Group (NYSE: PAG) to provide buyers of used cars free trials of the premium service. This will offer Sirius a shot at a number of prospective satellite-radio subscribers through 119 Penske dealers.
After all, Sirius doesn’t make widgets. The product (content) is already paid for. Each new subscription is almost all profit. Sirius recently capitalized on the popularity of Men’s Health magazine by adding Men’s Health Radio to its lineup. Liberty Media’s (NASDAQ: STRZA) uncertain intentions are having less of an impact on Sirius stock. It is probably fair to surmise that since Liberty was able to increase its stake from 40% to 46.2% without forcing share prices higher, whatever move Liberty ultimately makes is already baked into the stock’s value. That is a positive for Sirius in my book and even more of a positive for Liberty because they can achieve a controlling interest by acquiring shares at lower costs.
Are there negatives? To be sure! Streaming is touted by many to be the death knell for satellite radio. Rising stars like Pandora Media (NYSE: P) serve up more than a billion hours of Web-served music per month, and Pandora boasts over a billion active listeners. Upstarts, like Spotify and Songza, are also making a play for a piece of the action. Last month, Pandora reported a 58% jump in year over year revenues, from $46.8 million to $80.8 million. Spotify recently attacked Pandora's market share by offering free radio service to iPhone and iPad users in the U.S. Sirius does not have a strong economic moat, but despite these challenges Sirius continues to grow. This growth is factual and indisputable.
If this suggests that I am a convert to Sirius, let me assure you that I am not. Sirius reached its apex on February 18th, 2000, reaching a share price of $66.38. Over the subsequent 12 years, the stock has declined precipitously in price, closing as low as $0.06 per share on February 11th, 2009. Although the stock’s value has increased some thirty-fold in the past 3+ years, to suggest that it is a solid investment for the value investor or a good play for the trader is just unrealistic. Had it not been for the financial rescue afforded by Liberty Media, Sirius would only be a memory today.
These points I will concede: Sirius looks better, from a fundamental analysis perspective, than it has in quite some time. It is growing its subscription base and, as a result, revenues and earnings are improving. Sirius clearly has an extremely loyal following; never mind that I don’t understand why.
Will Sirius ever return to those heady days when shares traded in the $66 range? Not unless they institute a reverse stock split (hmmmm...that may be a good idea). This would give mutual funds an opportunity to hate them too. Just kidding! It's going to be interesting, at the very least, to watch the Liberty Media saga play out. I’m eager to see the result of Liberty’s appeal, eager to see if Liberty will pursue a conventional takeover if the appeal fails, and eager to see what Liberty would do with Sirius if they do control it at some point. In short, I like Sirius for its entertainment value--and I don’t mean its programming lineup.
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