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Summary

  • Sirius XM has a fat cash cow from its loyal pool of 25.5 million subscribers. Pay radio is still much better than ad-supported music streaming.
  • Large debt is a concern but I don’t think the company will go bankrupt soon.
  • Apple’s threat is just hearsay and doesn’t represent a clear and present danger to Sirius XM’s business.

I have some extra cash from my old poker bankroll. I'm quitting PokerStars for the next 6 months so I'm on the hunt for safe, long-term investments to stash some rainy-days money. I decided to investigate Sirius XM (NASDAQ:SIRI) and I found out this company is a better bet than Pandora (NYSE:P). My portfolio is tech-heavy, but I appreciate SIRI's strong moat of loyal monthly-paying customers.

Don't get me wrong, Pandora fans, I might still bet on P in the future but at the moment, Sirius is my serious prospect for serious investment.

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Pandora did a better 2014 YTD performance, +19.37% vs. -7.69%, but I appreciate the pay business model of SIRI. I also like that SIRI is now cheaper than last year.

Since January, SIRI has been in decline and I think for the near term, Sirius has still room to drop. Some people believe that Apple (NASDAQ:AAPL) will crush Sirius XM soon. However, as an Apple long, I doubt if Tim Cook will prioritize CarPlay this year or the next two years. Apple is all about high-margin products, it doesn't bother with small pickings.

At first glance on the chart below, a value investor will instantly dislike Sirius because it has several metrics that are obvious alarm bells. The high TTM P/E misleads some people to think that SIRI is overvalued. I agree, technicalities-wise, SIRI is currently overpriced with a P/E of 54, P/B of 7.20, and P/C of 146.55. The Book/Share and Cash/Share is pitiable, the Quick Ratio and Current Ratios are equally dismal. The Debt/Equity and LT Debt/Equity ratios are also in the red.

Source: Finviz.com

Sirius Is A Good Forward Bet

I'm a gambler - I always look to the future. SIRI's forward P/E is 22.65 and EPS is projected to be +43% for the next fiscal year. I analyzed all the negative aspects of Sirius XM and decided they are not as bad as some people think.

I'm no longer a strict follower of Benjamin Graham and Warren Buffett. I discovered poker in 2010 and I have incorporated implied odds in my investment strategy. The implied odds numbers are good that Sirius XM will quit being such a poor EPS producer and will soon come up with better net income numbers.

I looked at the company's income statement and I found out that Sirius is seriously bad in wringing profits out of its 9-figure revenues over the last five years. The company did a decent year-over-year increase in sales but management seemed to forget about the net income numbers.

SIRI's current management must be disciples of Mr. Jeff Bezos and his sales-growth-first-before-profit mantra.

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Source: Morningstar.com

I also like SIRI because it enjoys a healthy 27.50% operating margin so the management isn't really as incompetent as others believe. The short float is a non-threatening 8.15%. The experts at Finviz gave SIRI a target price of 4.44, which is near my own one-year price target of $4.20.

Source: Finviz.com

The $2 billion buyback program of the company would have been better budgeted for improving Sirius XM's profitability. The ROA, ROE, ROI numbers are quite unimpressive. The money ought to have been used to reduce the $3.6 billion debt.

Source: Yahoo Finance

More Revenue, Less Expenses

Sirius instituted a price increase in its monthly subscription rates so I expect the company to post better revenue results this quarter. I also hope that the management's one-time charges last Q3 and Q4 2013 will no longer again occur this Q1 2014.

I am more optimistic than Yahoo Finance analysts who are only forecasting an EPS of 0.02. The company is cutting costs, refinancing debts, and is getting better contract renegotiations. I expect Sirius XM management to beat the Yahoo estimates during earnings report later this month. Despite the price increase in monthly fees, I believe the company retained its 25.56 million subscribers for this Q1 2014.

I also expect Sirius XM to continue increasing its pool of subscribers well beyond 2015. SIRI has 71% penetration in vehicles. The company also bought Agero's Connected Vehicle business last year. Agero's IP and talent can negate the threat of Apple's CarPlay.

Conclusion

Sirius XM has a steady cash flow. Look beyond the weak EPS performance and bet on the future. This satellite radio company is not yet a dinosaur. Despite the entry of Pandora, Apple, Google, Samsung, and Spotify, Sirius XM continues to grow its subscribers. SIRI is a money making T-Rex of the radio industry. It can eat up Pandora and Spotify easily if it wants to.

The pay-radio business model of SIRI is much more dependable than the ad-supported streaming music model of competing firms. SIRI offers safety to long-term investors. This stock is a good buy at current price level. Liberty Media might again offer a better takeover price in the future. John Malone's initial $3.68 offer was rejected by SIRI's board. But we never know, Malone might make another attempt this year to next year.

However, I am waiting for SIRI to go down to around $3.00 before I make a bet. The propaganda about Apple's entry to streaming music is still a loud noise that shorts are using to pound SIRI. Barclays upgraded SIRI to Overweight and gave it a new PT of $4.00.

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Source: Sirius XM Deserves The $4 Price Target From Barclays