Sirius XM (NASDAQ:SIRI) is one of the most widely followed companies. It is the only satellite radio provider in the U.S. and has more than 135 channels and over 22 million subscribers, making it one of the largest subscription media outlets in the U.S. At present, Sirius generates almost all of its revenue from subscriptions.
In addition, Sirius is heavily dependent on the automotive market, as the company has contracts with a number of major car manufacturers. Today, many car manufacturers pre-install Sirius satellite radio units in to their cars destined for the American market. Sirius radio units are considered as a premium add-on, by both car producers and potential customers. Currently, General Motors (NYSE:GM), Ford (NYSE:F) and Toyota (NYSE:TM) are all among Sirius XM's biggest partners.
Sirius plays host to a variety of celebrity radio DJs, including Oprah, Martha Stewart and Howard Stern as well as a number of sports personalities. The use of such figures has contributed significantly toward making Sirius XM the well-respected, widely used radio system that it is today. In fact, in addition to providing components for cars, they also manufacture units for boats, homes and offices.
In addition, Sirius is constantly striving to decrease the churn rate (turnover rate). As subscriptions are the main source of revenue, it is important to Sirius to keep their churn rate as low as possible. Acquiring new subscriptions is a costly endeavor, as it includes the expense of both marketing and advertisement.
Sirius stock is currently trading at slightly above $2. he 52-week range for SIRI is between $1.27 and $2.41. Furthermore, the firm has a current market cap of $7.75 billion. At present, the average one-year target presented by analysts for SIRI is $2.57, and the stock has a relatively high Beta of 1.64. From mid-May through to early-July, SIRI has been consistently trading close to $1.8. In early July, the stock started to climb, but it is still a long way from reaching its resistance level.
Sirius currently has an EPS of $.08 and a relatively high P/E ratio of 25.62. The P/B ratio for SIRI stands at 9.17, a rate significantly higher than the industry average. However, it is important to mention that the firm also has a very high ROE of 79.5%. Return on assets of 10.3 percent is close to the industry average. Both the price-to-sales and EV/EBITDA ratios are higher than the industry standard at 2.52 and 8.22, respectively.
In essence, this means that Sirius has high leverage in the market. The debt-to-equity ratio is quite high at 7.83. While the leverage is high; the liquidity position of the company is good. Current and quick ratios of 0.6 and 0.58 are close to the industry averages. The company has started generating sufficient revenues to cover costs, despite having high levels of debt. Sirius XM’s interest coverage ratio is close to the industry average at 2.55.
Sirius XM has been showing very positive numbers in financial performance. Revenues for Sirius were $3.1 billion for the last year, and remained fairly consistent over all four quarters. Currently, 94 percent of Sirius revenue is generated by subscriptions, of which around 53 percent comes from new automobile sales. Revenue growth stood at 7.6 percent, while the company’s net income was $457 million. These numbers yielded a net margin for Sirius of 14.8 percent, in comparison with the net margin for the industry overall, which stood at only 10.2.
Recently, Sirius has announced very encouraging subscription figures for the full year. The full-year forecast went up to 1.6 million from 1.3 million. Also, as the U.S. automotive industry has seen the highest growth since 2007, this will likely have a positive impact on Sirius subscriptions. Another reason for such greatly improved numbers is the reduced churn rate. Sirius expects the churn rate to be lower in the coming year, and the company is hopeful that they will surpass the 1.91 percent churn rate target. Sirius added 622,042 subscribers in the second quarter alone, 38 percent more than the number added in the same quarter last year. Subscribers added by Sirius were significantly higher than analyst estimates of 420,000. Due to these better-than-expected conditions, Sirius also raised their revenue targets from $3.3 billion to $3.4 billion for the current year. However, these estimates are still considered to be conservative for the company in the wake of current economic conditions. With such positive growth, I believe that the full-year subscription numbers could rise above 2 million.
At the moment, Sirius XM has no direct competitors in the development of satellite radio services, though there is a certain amount of competition from terrestrial radio channels that provide services for free. It is also important to consider competition faced from other audio media devices such as MP3 players, iPods, smartphones, and Internet radio stations. Another big challenge for Sirius comes from the rapidly changing technology. Over the long-term, commercial-free radio stations – available through digital channels – could potentially emerge as significant competition.
There are two extremes when it comes to Sirius investors: On the one hand there are the bulls and on the other there are the shorts. Sirius stock did not perform as much as expected when compared with the rest of the stocks. However, given increases in revenue estimates and the improving market for the auto industry, this time of year is the time when the bulls should get more “bullish” about their stock.
At the moment there is an important boardroom fight taking place between John Malone, Chairman of Liberty Media (LMCA) and Mel Karmazin. Currently, Liberty media holds about 46.2 percent of Sirius stock and has five board members also on the Sirius XM board. Malone is trying to take full control of Sirius, but Karmazin is standing firm and refuses to leave without a premium for shareholders. Malone's willingness to take control is considered by many analysts to be a positive step. Though such fights between board members is not a good thing, it is possible that something positive could emerge from the conflict.
There are also a large number of shares on the short side at present, providing another reason for the stock price to go up. About eight percent of the shares in float are sold by short sellers. Once the short recovery begins, Sirius XM may move up at a fast rate. After all, their stock is still trading substantially below its pre-crisis prices. I suggest holding on to the stocks you have bought, or buying now at the current low prices, if you have not done so already.
About the author:
Investment philosophy is to first determine the maximum loss, and invest accordingly. Like many value investors, we prefer to invest in stocks with the highest dividend yields, and highest EPS growth potentials. Telecommunication and energy stocks in emerging markets are among the favorites.
Based on extensive quantitative analysis, in any market, going short is risky. Statistical analysis shows that technical indicators work only if they are strong enough to convince the majority of the investors. Do not buy a stock at the top, do not sell a stock at the dip.