Sirius XM Radio Inc. (SIRI) has just released its 3rd Quarter 2013 financial results. Despite posting another healthy revenue growth, it saw its stock pummeled down by almost 10% from its recent high. Investors said they are disappointed with the less-than-expected performance of Sirius XM.
The Fallout after Earnings Report
The stock price is already down to $3.66 from a high of $4.18 last October 22. It went downhill right after Sirius XM issued its said 3rd Quarter 2013 earnings. This negative market reaction is unexpected considering this company actually posted an impressive 11% increase in overall revenue, $961 billion this year vs. 2012's $867 billion.
Investors who dumped their Sirius XM shares expected far better results for the company this year. Goldman Sachs (GS) has already downgraded Sirius XM due to its alleged sub-par performance, pegging the company's fair share value at around $3.50 - a big downgrade considering this investment company rated it at $4.25 just recently. Evercore (EVR) also downgraded Sirius XM, further inflaming more investors to abandon the company.
On the surface, this pessimistic market reception is quite comprehensible considering Sirius XM actually posted a lower 3rd quarter net income despite a significant increase in revenue. For this year's 3rd quarter, it only earned $62.9 million, a huge 17% drop compared to 2012 3rd Quarter net income.
Industry observers also pointed out that Sirius XM's earnings per share is still stuck at 1%. When Sirius merged with XM Satellite in 2008, investors expected a more robust return on their investment after 5 years of continuous revenue growth. The report also revealed that the company's operating expenses has increased by 7%, hinting that Sirius XM's management is having a hard time minimizing expenditures.
Subscribers Fee Increase
In conjunction with the release of its latest financial reports, Sirius XM also announced a $0.50 increase in their monthly subscription fee starting 2014. This announcement worsened investors' fears that Sirius will lose a large number of subscribers. The higher $14.99 monthly plan is a big turn-off to market experts because it goes against the current trend of "lower-the-price-to-attract-more-subscribers."
The satellite broadcaster is facing stiff competition from cloud-based internet radio stations like Pandora (P) and Spotify. This planned price increase is feared to cause mass defections among Sirius loyal fans.
What the Financial Report Really Says
The lower 3rd Quarter net income result of Sirius XM is just one low point. But if you really analyze the whole report, Sirius XM is actually performing better than ever. For 2013, this company is predicting a total of $3.7 billion in gross income and an EBITDA of $1.1 billion! That's a healthy 30% EBITDA/gross income ratio, confirming Sirius has a very profitable business model.
The report also said the company has a free cash flow around $900 million, signifying it doesn't need any loans to fund its operations. For 2013, Sirius also predicts 1.6 million new subscribers. As of 3rd-Quarter 2013, Sirius has a total subscribers base of 25.6 million.
For 2014, the management of Sirius XM predicted gross revenue of $4 billion and an EBITDA of $1.38 billion. Despite the pending subscription price increase, the company is still confident it will retain and even increase its pool of subscribers.
Sirius XM is a value investment company. It offers patient investors to look beyond the sub-par net income growth performance of this company and discover its core strength. This satellite radio broadcaster has a solid record of annual revenue growth for the last 5 years despite facing fierce competition from online radio stations.
It keeps on attracting new customers and is already recruiting smartphone users with the release of the iOS and Android Sirius apps. It is in no real danger of losing customers to online radio stations.
This company has a very healthy month-to-month cash flow and has zero exposure to debt problems. With a current market capitalization of $23.88 billion, Sirius XM is way bigger than Pandora which is only valued at $4.7 billion. Market expansion to other countries will keep this company's domination of subscriber-only radio broadcasting. Significant long-term gains can be had if investors buy this company's stock.
Company Buy Back of Shares
One more hint, despite the negative reaction of the stock market, Sirius XM's management said they will still continue their stock repurchase program. They already bought back $1.6 billion worth of their shares this year and the company board has just approved another $2 billion for buying back shares. This is clear evidence that the management believes that Sirius XM's stock is unfairly undervalued! They know the real financial numbers: trust them and you can earn big profits.