A favorable ruling by the Copyright Royalty Board on music royalties XM Radio must pay over the next five years sent the company's shares soaring near the closing of trading on Friday, gaining close to 7 percent for the day.
Friday's rally comes on the heels of a year long rally that has helped the stock gain 55 percent compared to the 18 percent of S&500. Not bad for a fallen Wall Street angel.
Back in the late 1990s (the high-tech bubble era), there were two satellite radio-broadcasting companies, Sirius (NASDAQ:SIRI) and XM Radio, each trading north of $40. The momentum crowd chased after their shares, cheering any time an auto maker would sign up with either company; and focusing on the popular stock market metric Earnings Before Interest, Depreciation and Amortization (EBIDA), and subscription rates (though the first six months were for free).
In the early 2000s, as the high-tech bubble burst, the momentum crowd deserted the stock of the two companies. Eventually they had to merge to survive, forming Sirius XM Radio. But the new stock continued to descend, trading in pennies, before the momentum crowd re-discovered it and pushed it close to the $3 mark.
The merger of the two companies allowed the new entity to become a monopoly in satellite broadcasting, while reaping the benefit of economies of scale associated with a larger organization.
This helped the company to improve its fundamentals and attract a new momentum crowd, dreaming of the stock's old glory days.
While such days may be far away, I do believe that the stock is a short-term buy for aggressive investors after Friday's favorable Copyright Royalty Board ruling, a decent earnings report (especially on the revenue side), and good technicals and fundamentals:
1. A bullish technical chart. While the price of the stock has improved, it still trades below the 100 and 200-moving averages.
2. Improving financials. Profit margins have jumped from 9.2 percent a year ago to 24.03%, according to the most recent earnings report; Total/Debt to Equity dropped from 492 to 71.73; and the company has plenty of cash at hand.
Sirus XM Radio
Quarterly Revenue Growth
Quarterly earnings growth
Total Debt/Equity (mrq)
*Fye Dec 30, 2013; Source: Yahoo.Finance.com
A Few Words of Caution: Sirus XM Radio continues to face three challenges: First, a technology challenge. With the rapid change in broadcasting technologies, and the Internet radio gaining ground, it is a matter of time before satellite radio becomes obsolete.
Second, an economic challenge. Satellite subscriptions are part of consumer discretionary spending -- which is usually negatively affected by a weak economy.
Third, a content challenge--as is the case with other broadcasters and content distributors, satellite radio is at the mercy of content producers enjoying oligopolistic power.
The Bottom Line: Sirius is a "fallen angel," which aggressive investors may want to pick up with caution.