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Time to Buy Sirius XM

April 18, 2014 | About:
Vinay Singh

Vinay Singh

5 followers

Things were going well for satellite radio provider Sirius XM Holdings (SIRI) in 2013. The media giant even hit a six-year high stock price of $4.18 on Oct. 22. However, the stock has been driven into a downward spiral since it released its earnings report. Sirius XM generated revenue of $961.5 million, signifying a year-over-year increase of 11%, but it missed out on the consensus estimate of $970 million. Shallow guidance for the next quarter, despite a rate increase, further hurt Sirius XM's share price as this was the first time in almost four years that the company is anticipating a drop in subscribers during the lucrative holiday quarter.

Furthermore, this also resulted in a growth in short interest in Sirius XM. The company ended November with nearly 303 million shares sold short, indicating a hefty increase of nearly 11% in just two weeks, making it the most heavily shorted stock in the U.S. These statistics do seem a little alarming, but does it make Sirius XM a short candidate? Let's find out.

Impressive and Consistent Growth

Back in 2008, Sirius XM was posting huge annual losses of over $5 billion. Since then, the company has engineered an impressive turnaround and may be investors expect far too much from it. Sirius XM has always been conservative with its guidance, but the market isn't fond of that. The quarterly result wasn't terrible as Sirius XM is generating record growth where it counts, with adjusted EBITDA surging 21% and free cash flow growing 26% for the quarter.

Criteria

3- Year Growth

Net Income

245%

Free Cash Flow

390%

Earnings Per Share

210%

Revenue

34%

Profit Margin

157%

As it is evident from the table, Sirius XM's metrics have been improving quite consistently for the past three years and there's no reason to believe that the company's bull run has ended just because of rising short interest. Furthermore, the spike in short-interest isn't frightening as it is highly likely that stock price can move north even after the increase in short interest. For instance, earlier in February, short interest in Sirius was peaking with more than 414 million shares sold short, but it didn't have any kind of negative impact on the stock as it kept moving higher.

Price Hike and Share Buy Back

In October, Sirius XM pushed its monthly subscription rate higher, from $14.49 to $14.99, for the first time since 2008. While bears claim that the combination of price hike and increased competition from Apple (AAPL)'s iTunes Radio will hurt Sirius XM's future margins, they tend to forget a few things. Firstly, Sirius XM has a completely unique business model and it doesn't face any direct competition. There's no other major company directly competing against Sirius XM in the "streaming radio for cars" sector. This is the primary reason why the media giant has never had a problem growing even as companies like Pandora (P) have exploded in popularity.

Secondly, when Sirius XM hiked the basic package rates back in 2008 (from $12.95 to $14.49), it had no negative impact on the subscriber number. Moreover, customers are used to seeing their satellite television bills crawl higher every year, thus they shouldn't have any complains about an increase that resonates with the inflation. Thus, the bear argument in this case looks flawed, and I don't think a price hike of merely $0.50 will have a negative effect on subscriber number. Also, right now, Sirius XM has a $4 billion repurchase sanction outstanding — roughly 15% of Sirius XM's market value — so, I don't think Sirius XM investors have anything to worry about.

Automobile Sector Will Drive Growth

While it's true that Pandora and Spotify do pose a threat so Sirius XM, it isn't a big one right now. For instance, take a look at the number of paid subscribers of all the three companies. Pandora has nearly 3 million paying subscribers, while Spotify roughly has 6 million. Meanwhile, Sirius XM has 25.6 million paid subscribers and that figure is only going to creep higher owing to the company's strong relationship with car manufacturers.

Sirius XM is fated to benefit from a long-awaited revival of the U.S. automobile sector. As of now, Sirius XM's hardware is installed in more than 50 million vehicles, but that figure is poised to grow further. The automobile sector took a huge hit during the Great Recession, but with car sales returning to pre-recession levels, Sirius XM is destined to bounce back. Analysts are estimating deliveries of new cars to rise to 16.1 million and for this reason, Sirius XM's future looks bright. Presently, 70% of the new cars produced come with Sirius XM receivers installed and historically, around 45% of them convert to paying subscribers. Taking it all into account, Sirius XM's sub count could grow 50% to 60% in the coming years.

Conclusion

Even though the shallow guidance reflects that Sirius XM's streak of seven consecutive quarters of double-digit revenue growth is coming to an end, it still looks enthralling in the long run. The revival of the U.S. auto market along with the perfectly timed price hike is set to drive Sirius XM's margins higher. Therefore, I would definitely not recommend investors short Sirius XM. In fact, I think the recent slide in share price is the ideal entry point for new investors.


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