Seeing Past Sirius XM's Q3 Earnings

| About: Sirius XM (SIRI)

Sirius XM (NASDAQ:SIRI) is a satellite radio broadcasting company that has made a big comeback since the overall market bottomed in 2009. At that time, the company that once traded at $7 per share had fallen as low as 20 cents per share. But since 2009, when it was bailed out by Liberty Media (NASDAQ:LMCA), Sirius has made an impressive resurgence to levels near $4 per share. Since a major part of the company's business model relies on satellite radio in cars, Sirius XM has benefited from increasing auto sales.

2013 Q3 Earnings

Leading up to the company's 2013 Q3 earnings report, Sirius rose from under $3 to above $4 and then pulled back after the report was released. During the third quarter Liberty Media took majority ownership and control of the board while CEO Mel Karmazin was replaced by Jim Meyer. The company also declared a 5 cent dividend and a few multi-billion dollar buybacks. They also announced their intent to acquire Agero's Connected Vehicle Unit for $530 million. Connected Vehicle is an automobile product that connects drivers with digital services.

One of the reasons investors were somewhat disappointed by the earnings report was that the guidance for 2014 was below expectations. The company's debt caused them to announce a huge charge for both Q3 and Q4. The interest on their debt will increase because Sirius will be widening its debt with the share repurchasing and Agero acquisition. On a positive note, Q3 marked a company record on gross revenue of $961 million, which was an 11% increase from the 2012 Q3 earnings. Month to month revenue, as well as quarter to quarter revenue is also steadily improving.

Track Record

Unlike the terrestrial radio industry, Sirius XM has experienced impressive annual revenue growth the past three years. The company earned $2.8 billion in 2010, $3 billion in 2011 and $3.4 billion in 2012. Their target for 2013 is $3.7 billion. Paid subscriber growth has also been impressive, increasing 9% to 25.6 million in 2013. In the third quarter alone, Sirius attracted 513,000 new subscribers. This large subscriber base ensures comfortable cash flow, which has also improved substantially in the past year.

Sirius disappointed investors, however, with its forward statements about subscribers, projecting a Q4 slowdown in new subscribers during the holiday season. Part of this outlook may be due to the arrival of iTunes Radio in September, which attracted 20 million unique listeners in its first six weeks. Google (NASDAQ:GOOG) has also entered the picture with a music service to compete with Pandora (NYSE:P) and Spotify. At the same time Sirius expects an increase in self-pay subscribers.

Internet Competition

To counter the threat of internet streaming companies such as Pandora, Spotify and iTunes Radio, Sirius has launched a paid streaming service for Android, BlackBerry (NASDAQ:BBRY) and iOS users. The service can be an add-on to existing subscribers or just a mobile internet service for new subscribers. This move also provides a new revenue stream for Sirius, which is important since smart phone sales now outsell car radios.

The company's expanding business model shows they are prepared to compete with other technology. Since the 2008 merger between Sirius and XM, the company's competition in satellite radio has been nonexistent. While Pandora, Spotify and iTunes Radio are entirely music streaming services, Sirius also offers news, talk and sports. Sirius is also the home of Howard Stern, the most popular and highest paid media figure of the past few decades. In his radio days, Stern was always number one and is extremely difficult to compete against.

Sirius Products

Sirius sells various packages of its satellite radio service to subscribers for a monthly fee. Their most popular options range from $14 to $18 per month, although the company announced it will raise fees by 50 cents starting in January 2014. The Sirius Premier option offers over 150 channels. People are willing to pay for the programming because it's commercial free. One of the main attractions to the service is its sports programming, which includes NFL, MLB, NBA, College Basketball, PGA and NASCAR. Travelers also benefit while driving from city to city without hearing static interference.

The Future of Sirius

Today Sirius XM has a market cap of $23 billion. Although it is trading around 50 times earnings, it appears to be a safe investment for the long term because of its well structured financing from Liberty Media and its solid business model. Total debt is over $3 billion, but they've kept liabilities balanced with growing assets over the past three years. Most analyst price targets are pointed higher.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.