Sirius Could Become A $10 Stock When Takeover Drama Ends
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It looks like Sirius XM (NASDAQ: SIRI) is actually growing faster than we thought. The company now estimates that it will add 1.6 million subscribers in 2012, rather than the 1.3 million initially forecast. The forecasts are apparently based on the huge surge of auto sales that occurred in June.
This raises an interesting question for investors. Will this boost in subscribers bring any sort of boost for Sirius's stock value? Well, perhaps. The news about the subscriber boost was released on July 9, 2012, and Sirius shares were trading at $2.08 a piece by the end of the day. That's a slight gain, but can it be sustained?
Or perhaps because Sirius also seems to be doing a good job of controlling what's often called subscriber churn. This churn occurs when a new car buyer lets his or her Sirius subscription lapse. Well, Sirius has apparently figured out how to reduce the churn rate to 1.91%.
If that figure is correct, it means that 98.09% of Sirius subscribers are renewing. That, of course, is good news for Sirius stockholders, because it means more cash flow. Thomson Reuters estimated that means Sirius will be able generate $3.4 billion in revenue this year, which is pretty healthy.
If this good news continues, Sirius's stock should be in for a slight boost, since this is one company that is actually generating cash...and a lot of it. The company has been turned around successfully and is slowly becoming a cash cow.
So it is easy to see why John Malone and his Liberty Media (NASDAQ: STRZA) are fighting so hard to get control of Sirius. The company is very profitable and should continue to remain that way for the foreseeable future.
Sirius Offers a Bargain Product
The question that we have to ask is if Sirius can maintain these profits in the face of competition from Pandora Media (NYSE: P) and with the weak economy. The short term answer would be yes because Sirius has been able to generate large amounts of subscriptions and keep the churn low in the weak economy.
If it can maintain this kind of growth and cash flow in this economy, Sirius should have no trouble surviving the ongoing downturn. After all, entertainment is one of the few things people seem not to cut back on in tough economic times.
So is Sirius recession proof or not? The answer would seem to be yes because it has a unique product that people can't get anywhere else. It provides a vast amount of entertainment options for a surprisingly low price.
Sirius Select costs just $14.49 a month, and the vast majority of Americans can easily afford that. For that $14.49, you get 130 channels of radio programming a month, including every NFL game, every NASCAR race, commercial free music, and Howard Stern. That's actually a bargain, and in this age of job insecurity and falling incomes, bargains sell. Even Sirius Premier costs just $17.99 a month, and that's about the price of lunch at McDonald's for the average family.
Sirius is Recession Proof
So Sirius is actually a sort of discounter, which is why it is doing so well in today's economy. It's selling a superior product for a lower price. More importantly, it is selling a superior product that people love and want more of for a really low price.
Like cable and satellite TV, it offers such a superior product that people can't live without it. Most of us can't live without our two or three favorite cable TV channels, can we? The same goes for Sirius. Vast numbers of people can't live without Howard Stern, NASCAR, and Major League Baseball. They are willing to pay extra for it, and they are not paying that much.
The answer is yes, Sirius is actually recession-proof because it is a bargain. It is a luxury or creature comfort that almost anybody can afford. That should worry terrestrial radio operators, such as Cumulus (CMLS), Clear Channel (CCO), and CBS (CBS). Yes, they are offering a free alternative, but it is an inferior alternative. Choices on terrestrial radio are limited and you have to put up with commercial interruptions.
Your local radio station probably only covers the games of one baseball team, the one in your area. If you live in Denver and you're a Yankees fan, the only way you can listen to the Bombers in your car is on Sirius. The Denver radio stations only provide coverage of the Rockies. The same goes for basketball, hockey, soccer, and football.
The recent subscription projections prove that Sirius is taking a share from terrestrial radio, and more importantly, keeping it. The strategy of offering far more choices for a lower price has worked and worked well. The company has managed to keep most of its existing subscribers and add new ones.
That gives it both a steady cash flow and earnings per share, and real possibilities for growth. The growth possibilities are there because of the low price and the huge and largely untapped internet radio market.
Sirius is a Value
This, of course, makes Sirius a really good value play and poises it for growth in the future. The company has a product that people want and no real competition. More importantly, it has a product that is cheap enough to be practically recession proof, so it is easy to see why this stock value is growing.
Sirius should continue to grow in both share value and earnings because of this. This growth should continue for the foreseeable future because nobody else is doing what Sirius is doing. Pandora is trying to get into cars, but it does not offer anything besides music. That means its offerings are limited and it is vulnerable to competitors such as Spotify.
The only drawback to Sirius is, well, it's going to take quite some time for the market to realize the true value of this stock. That means really low Sirius share prices are probably going to stick around for the foreseeable future. The takeover drama between Malone and Sirius boss Mel Karmazin is likely to continue and scare off a lot of potential investors.
The only way Sirius shares will see a huge jump in value is if the takeover drama ends. If and when it does, the stock should go up and then stabilize at a price that reflects its true value. That will probably be close to $10, which should be good news for investors.
Even that will take some time because Sirius will have to demonstrate that it can keep those cash flows up on a regular basis. At the moment, it looks like it can, even in the face of the recession.
The current situation at Sirius proves that turning a company around and making a lot of money doing it is easier than convincing the market of a stock's true value. If the market ever wakes up to Sirius, it is going to be exposed as one of the best values out there because it's a company that's actually making money in the recession.
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