Sirius' Strong Quarter is Icing on the Cake for Malone and Company
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Sirius XM Radio (NASDAQ: SIRI) is currently having a promising year. Subscriber numbers are up despite raising the premium. Sirius is positioned to outperform its initial expectations for the year. Domestic auto sales increasing throughout the summer in conjunction with improvements and upgrades to the Sirius platform are mainly driving the recent increase in revenue and earnings. Current shareholders in Sirius should also consider investing in Liberty Media (NASDAQ: STRZA) as well. Good news for Sirius leads to good news for Liberty Media, as it owns 46 percent of Sirius stock.
Sirius’ growth rate this year is around 10 percent below the industry average. Its projected growth rate for next year is more than double the industry average. Its projected growth rate for the next five years is around 60 percent higher than the industry average. Sirius’ trailing 12 months price to earnings ratio is more than double the industry average of around 11.98. Its price to book ratio and price to cash flow ratio are significantly higher than the industry averages of around 1.38 and 4.23 respectively. Its debt to equity ratio decreased by around 20 percent from the fourth quarter of 2011, and is currently around 3.48.
Sirius had outperformed its own expectations with a successful 2Q12 that allowed it to raise revenue and subscriber expectations for 2012. Sirius added over 620,000 subscribers in the second quarter of 2012, this is a 38 percent increase YOY. Sirius added over 1 million subscribers in the first 6 months of 2012 opposed to over 825,000 in 2011. Sirius has raised its guidance to 1.6 million subscribers and $3.4 billion in revenue by the end of 2012. It was already 64 percent the way there despite raising subscription prices. Sirius has also made progress towards improving its product. It released Lynx, the advanced receiver for the Sirius 2.0 suite earlier in the year. It also has been busy throughout the summer with special appearances and new shows featuring popular celebrities like Aziz Ansari, Coach K, LeBron James and a new nightly sports talk show with Artie Lang and Nick DiPaolo.
The success is also partially due to the unique model in which its operating expenses are already paid for and do not increase with each new subscription, it’s mostly profit from here on with each new user added. The success in the second quarter is mainly driven by the increasing sales through the spring seasons and the record setting sales during the summer months for auto manufactures like Ford (NYSE: F). General Motors (NYSE: GM) also contributed significantly to Sirius’ improved sales numbers. In June, Ford auto sales were up seven percent. During the same time period, General Motors increased auto sales by 15 percent. Both of these domestic manufacturers have seen a substantial increase in sales across almost all of their models. As the auto industry continues to rebound, Sirius will have a greater opportunity to improve its revenue throughout the year as it continues to aggressively increase its market penetration with popular auto makers.
Sirius’ success is also due to the proliferation of mobile radio apps run by Google (GOOG). The popularity of the Apple (NASDAQ: AAPL) mobile products have a similar impact as well. Smartphones subscriptions with AT&T (T), Verizon (VZ) and even Sprint (S) are growingly significantly in 2012; this trend improves Sirius opportunity to increase its market share outside of the auto industry. Apple’s anticipated release of the iPhone 5 should also improve Sirius’ subscriber numbers throughout the fourth quarter of 2012. The launch of Google’s Nexus 7 tablet may also have a significant impact on expanding Sirius’ market share for the remainder of 2012.The Sirius subscriber base is at a record high at an 8.4 percent increase YOY. In the previous quarter, Sirius’ Self-Pay subscriber net additions increased by over 147 percent YOY to almost 300,000.
The recent success led a Barclays (BCS) analyst to raise both Sirius and Liberty Media to equal weight from underweight and overweight, respectively. The analyst projected a 12 percent upside for Sirius shares and a 10 percent upside for Liberty Media shares throughout the remainder of the year. The improvement in auto sales and the fact that subscriber sales didn’t affect churn or retention rates were the main catalysts for the change to a positive outlook for Sirius. Liberty Media will continue to do well behind the success of Sirius. Regardless of Sirius’ recent success, Malone and Liberty Media are committed to taking control of Sirius XM Radio. Right now, the most likely scenario is a Reverse Morris Trust that could have a number of possible outcomes for Sirius shareholders dependent on the FCC’s decision.
It’s important for current shareholders to understand Malone is the majority stakeholder in Sirius shares. He is committed to making sure he benefits from the premium before other Liberty Media and Sirius shareholders. Liberty Media initially bailed Sirius out from avoiding bankruptcy when it bought into 40 percent at $0.10 per share years ago. With Sirius trading around $2 per share, Liberty Media has 46 percent interest and five out of the 13 seats in the board. Malone is currently lobbying the FCC in order to gain control of Sirius without needing the majority 51 percent stake.
History shows Malone prefers to avoid tax premiums if possible, and the Reverse Morris trust is the way to accomplish this. Liberty Media did the same with DirecTV (DTV), a buyback and spinoff is most likely in the end with the premium ultimately going to Malone and Liberty Media shareholders. Current Sirius shareholders would be best served by holding onto Sirius for capital appreciation throughout the year while hedging their interests in Liberty Media shares as well. Shareholders should anticipate and safeguard their investment against the eventual takeover. After the inevitable acquisition, Malone ultimately hopes to appoint a new CEO, possibly from Sirius in-house, while expanding and innovating upon Sirius’ currently limited global and technological portfolios.
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