GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Sirius: Satellite Radio Has A Lot To Offer And Why It's A Good Investment

December 16, 2013 | About:
10qk

Gordon Pape

15 followers
Contributing editor Glenn Rogers is here for the last issue of 2013 and he's been spending some time listening to the radio, as have I. We both agree - satellite radio has a lot to offer and today he tells us why it's a good investment. Glenn is a successful businessman, entrepreneur, and investor who has worked in both Canada and the U.S. He and his family live in southern California. Over to him.

Glenn Rogers writes:

I was thinking of a good way to play the continuing strength in new car sales. The recent reports from the major auto manufacturers were very strong and of course there is nothing wrong with simply making an investment in Ford, GM, or Volkswagen - my three favorites at the moment.

Also, a number of the auto-parts manufacturers like Johnson Controls (JCI) and Borg Warner (BWA) are interesting opportunities.

But the derivative play I particularly like right now is Sirius XM Holdings (SIRI). I was speaking to Gordon about this idea and he reported that he recently bought a new Lexus, which came with Sirius XM satellite radio installed on a three-month trial basis, and that he was really enjoying the service. One of the advantages he noted was that it's possible to listen to CBC while travelling in the U.S.

He is not alone in his reaction. Many of the new subscribers to Sirius XM are acquired in this way. Typically the conversion rate runs between 44% and 46% of new car buyers.

Currently, 70% of the new cars produced come with Sirius XM receivers installed, which is why new car sales are so helpful to the company. This is not to say that the used car market is not important. There are already 57 million cars in the U.S. that have satellite receivers installed but more than 30 million are not active. So converting the new car trials and activating existing radios offers a compelling opportunity for the company. By 2017 the installed base should hit 100 million.

The company has had a long and interesting history beginning with the XM radio debut in 2001. Sirius, which was a competing service at the time, followed a year later. The companies battled each other for six years, which pushed up program costs. The intense competition almost resulted in both companies going under but fortunately cooler heads prevailed and the companies finally merged in 2008.

Since then the company has begun getting its programming costs under control, reducing them from more than $450 million to $300 million this year (figures in U.S. currency). Much of this content is pure music but the company also offers a wide range of news channels, comedy channels, and major league sports, recently adding an exclusive NBA channel which started Dec. 9. Currently the company pays a royalty of 5% to cover the music costs; that will rise to 11% in 2017.

The Sirius XM subscriber base has steadily increased over the years, growing over 35% between 2009 and 2013 for a compound annual growth rate of 7.8%. Last quarter the company added over 500,000 customers which was more growth than any of the satellite/cable television companies such as Comcast or DirecTV. Because of that strong subscriber growth, revenues increased from $2.5 billion in 2009 to an estimated $3.7 billion in 2013, a jump of 48%.

The company is profitable. Back in 2009, Sirius XM earned $463 million and the company will make over $1 billion in 2013. This indicates a growth of 146% since 2009. Profit margins exceeded 30% for the first time in the second quarter and the company is driving towards 40% profit margins. The share price has also increased dramatically since its low of $0.15 December 2008 to the Thursday close of $3.47, which would indicate a stunning increase of over 2400%.

The company should generate nearly $1 billion of free cash flow this year and that is projected to grow to nearly $2 billion by 2016. The company plans to retire about 40% of its equity over the next five years.

Readers will also be familiar with other popular music services like Pandora and Spotify but there are important differences between those and Sirius XM. First, Sirius XM has about 25.1 million subscribers versus 6 million for Spotify and 2.5 million for Pandora. This makes Sirius XM four times bigger than the second-largest competitor. Additionally, both Spotify and Pandora are largely free for users or are advertising supported although both services are trying to drive to a paid subscription model.

There are people who do listen to both services by streaming via their smart phones through Bluetooth or direct connection to their car stereo but this requires unlimited data plans otherwise you risk running up a large cell bill.

Doubtless cars will be getting smarter and before long wireless modems will be built in to the car dashboards allowing for more streaming from other services. But much of this traffic may also be handled through Sirius XM satellites so they may benefit as the technology improves. The company just placed a new satellite in orbit that will allow it to provide more services to a larger percentage of the population.

Liberty Media (LMCA) holds a majority stake in Sirius XM with a 53% position but they have recently announced that they will sell back $500 million worth of shares in the company. They got the majority of that stake because they provided a $400 million loan to the company when was on the verge of bankruptcy, which turned out to be a great deal for Liberty. Prior to the announcement that they were going to sell back some shares, Liberty had spent $1.7 billion increasing its stake to the 53% mentioned above.

I think the stock can continue to appreciate and is not unfairly priced compared to other similar media companies.

Action now: Buy with a target of $5. The shares closed Thursday at $3.47.

About the author:

Gordon Pape
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.8/5 (4 votes)

Comments

stevenramsey
Stevenramsey - 8 months ago
You're right that it's a great company (a monopoly), with a subscription model, growing cash flow margins, and further room to expand it's leverage at low rates. And they have a great controlling shareholder in Liberty Media. But the wise thing to do here is look out further than 1-3 years. If you're saying in 5 years they'll shrink the share county by 40%, then look out that far and ponder where the shares would sell. This company has such a long runway of growth that an intrinsic value of $5 is waaayyy to low. It's probably even better to approach this as John Malone is. So the Malone/Maffei thought process is probably something like, "We're not going to sell the stock at $5 because the levered equity returns are so compelling for the next 5-10 years. Since SiriusXM is able to repurchase large amounts of stock while making the investments and acquisitions to stay ahead in the 'connected car' space, the growth rate looking out into the future is huge. Alongside that, Sirius is only in North America right now (and Malone has stated that he would like for the company to look at global opportunities)." I think the template is similar to DTV, which Malone is still a major shareholder of.
rkapoor
Rkapoor premium member - 8 months ago
Any comments on valuation. For example, how did you get to a target of $5. Thanks
altamami
Altamami premium member - 8 months ago

The biggest drawback to SIRI is their product. It's outdated. Internet on-demand, radio, podcasts, and the whole move to the internet of everything is making satellite radio obsolete. That's the problem. It's not about valuation, market data, or any other element. Cars are moving to become a separate entity on the web (see: Cisco's efforts in this among others). Internet content providers have much lower operating costs, that is why the space is crowded because barrier of entry is limited.

SIRI might change course and might develop technologies to overcome the competition, but it will be costly and it will require a significant change to their current direction.

Finally, do not think that because SIRI has more subscribers they have the better product or future. Read the Innovator's Delimma, it talks exactly about this situation where new innovative technologies that initially service small markets (e.g. Spotify and Pandora) move up the chain and start invading the incumbents of the bigger market (e.g. SIRI), and in a blink of an eye the incumbent loses favor quickly and realizes that he simply doesn't have the technological know-how to compete with the new demands of its customers who want internet on-demand and radio products. See BlackBerry and Apple iPhone.

Good luck.

Genly Ai
Genly Ai premium member - 5 months ago

SiriXM's current product is broadcast radio. Not internet on demand. It does seem outmoded compared to what one can do with Pandora and YouTube and ...

BUT SiriXM is better placed than anybody for taking advantage of the Web of Things as it involves cars, trucks, boats, off-the-road vehicles etc. The internet of things will come to cars. Imagine a day when your car company can tune your car's operating system (the one that handles fuel injectors, etc.) so it fits with where you live. Mountains? Extreme cold? whatever.

Why is SiriXM well positioned? Because the Web of Things is largely limited to things attached to the web thru land lines or local WIFIs. Vehicles need a different technology: cell towers.

This presents a small dilemma because broadcast technology from satellites will remain cheaper than from cell towers. Of course to join the internet, a car must be able to talk as well as listen and for that the cell phone towers are more efficient. The company that can take advantage of this dilemma will have the technology to do both. Rather like Direct TV with its downloads through satellites and uploads thru telephones. That operating system tweak can come to your car from the satellite. It may require lots of data. The need for it can will not require lots of data and can be uploaded via cell towers.

SiriusXM is well positioned to take advantage of this because it is (now) profitable and large. It can afford the costs of developing the Mobile Web of Things. It already that the expensive satellite hardware in place. Cell towers it can use like any other app. It already has the necessary contacts with car manufacturing. And it has acquired the expertise and it has the motivation. Here are some excerpts from what president Jim Meyer had to say in the Q4 2013 conference call:

"Now let me give you an update on our connected vehicles strategy. We know where the auto makers are going in this area, and we have a clearly defined strategy to execute and win in this business.
...
As an early stage growth business, we expect the connected vehicle services product line to contribute at or near breakeven on an EBITDA basis in 2014, but with high variable margins, a relatively low capex profile, and substantial scaling in the business as penetration expands
...
Just keep in mind the connected vehicle business is still in its very early days. Building this business is a key step in realizing our vision of a merged satellite and IP connected environment that will truly deliver amazing features to our subscribers and benefits to our business. The race we are running is a marathon, not a sprint."

Meanwhile their core business is doing well.

I will be buying into this but somewhat slowly as the PEG ratio is high. :-)

irie267
Irie267 - 1 month ago

In its current Price/Value state, I would never consider buying SIRI. My first introduction to the company was earlier this year, when a purchase of a VW came with 6 months of free radio. Initially, I liked it, but as time went on, its preference faded fairly quickly. I asked myself: is this something I would pay $18 a month for? The answer, for me at least, is a resounding "No". Although there are no commercials, it is just as repetitive in its song choices as an AM/FM radio, it's another monthly bill (i.e. costs money), and it doesn't work under bridges or other obstructions. My car came bluetooth, which is what I assume all newer vehicles are being equipped with. I just stream Pandora via bluetooth; it doesnt cost anything (unless you want it to with anoptional subscription), you can create the exact station you want (instead of using pre-existing channels that are just approximations), and it doesn't cut out when under bridges or other obstructions. It provides roughly the exact same output as SIRI, but it doesn't cost anything. Additionally, using Pandora barely scratches the data plan on my cellphone carrier, so there are no incremental costs there. There is nothing that SIRI provides (that I can tell aside from being commercial-free) that can't be substituted for free with Pandora or another music/media app and a bluetooth connection that most newer vehicles come with anyway. Just my $.02.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK