American satellite and internet radio giant Sirius XM Holdings Inc. (SIRI, Financial) reported its quarterly results before the market opened on Wednesday. The company maintained a similar trendline on its top line after another modest gain in revenue failed to ignite investor optimism.
Its bottom line, however, increased 40% from the prior-year quarter while its subscriber base topped 33 million for the first time, adding 330,000 subscribers during the quarter. Sirius XM has been expanding its product offerings over the last several years to adapt to changes in consumer behavior.
Chief Financial Officer David Frear noted the company has “continued to grow adjusted EBITDA while investing in technology, content and returning capital to stockholders."
In the first quarter alone, Sirius XM repurchased over 52 million shares of common stock for approximately $295 million and paid nearly $50 million in dividends to shareholders. This resulted in about $345 million worth of capital returns from January to March 2018.
This is probably one of the reasons shares of Sirius XM rallied more than 25% between Jan. 2. and March 13. before embarking on the current pullback.
Despite the recent pullback, shares of Sirius XM still appear relatively expensive compared to peers. The current price-earnings ratio of about 44 times is significantly higher than the industry average of about 21 times. Its price-sales ratio also appears expensive compared to rivals at 5.1 times versus an average of 1.6 times for the industry.
One crucial area that Sirius XM trumps industry peers, however, is its operating margin, which stands at about 30% compared to an average of 10% for the industry. This has played a significant role in the company’s cash generation engine, boosting its operating cash flow by 34% in the most recent quarter to top $415 million. On the other hand, free cash flow increased 31% to $327 million. Its cash to sales margin of about 32% makes Sirius XM one of the best companies among its peers. It has a projected free cash flow of $1.5 billion for the year, which again looks strong based on its top line.
If investors analyzed the stock solely based on its cash reserves, then they would be quick to buy or add to their existing positions.
For Sirius XM, however, it appears cash may not be king. It appears investors are looking at the company’s growth prospects, especially its top line, which has been modest at best for the last several years.
Its revenue projections for the current year also failed to garner any excitement from the investment community after management upheld its initial estimate of $5.7 billion. Sadly, this will be a significant decline in the company’s top-line growth rate compared to additions in each of the last three years.
The company has been averaging $400 million in revenue growth, but the current estimate suggests growth of $270 million from last year's revenue of $5.43 billion.
So, what's next for Sirius XM?
As management stated in the earnings call, Sirius XM has continued with its investments in innovative technologies and content. Specifically, the company is facing a bigger threat than a few years ago, with technology giants like Apple Inc. (AAPL, Financial) launching Apple Music and Spotify (SPOT, Financial) and Pandora Media Inc. (P, Financial) continuing to disrupt its business with their internet radio and music streaming services.
In summary, Sirius XM's outlook looks tepid, which explains why even the share buyback program and strong cash flow position the company finds itself in may not be enough to trigger a major upward movement in the short term.
Things could change in the long term, however, if the company’s new investments begin to pay off.
Disclosure: I have no position in stocks mentioned in this article.
