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Summary

  • Sirius’ performance this year has been weak and the trend could continue post earnings.
  • Sirius’ business has already started stagnating, while the advent of Apple with CarPlay is another bad sign.
  • Sirius has a weak balance sheet and a high valuation.

Satellite radio services provider Sirius XM (NASDAQ:SIRI) has had a troublesome year thus far. The stock has lost 10% of its value and it seems as if strong competition from the likes of Apple (NASDAQ:AAPL) and other new competitors will take it down further. Sirius has a chance of triggering a turnaround when it releases its first-quarter earnings on April 24. However, even if the company manages to post good results, there isn't a guarantee that it will continue performing well.

Already weak

Analysts' expectations regarding Sirius' performance in the first quarter isn't too great either. The company's revenue is expected to grow a shade under 11%, while earnings per share are expected to remain stagnant on a year-over-year basis. Moreover, Sirius' earnings record in the past is quite bad. It has missed the bottom line estimate by big margins three times in the last four quarters. As the threat of competition from bigger peers is looming large on Sirius' head, I believe that it is best for investors to stay away from it.

For instance, Sirius' new vehicle consumer conversion rate had dropped to 42% from 44% in the same quarter last year. In addition, it experienced lower new vehicle consumer conversion rate. Moreover, Sirius' penetration rate at major automakers in the fourth quarter last year was 71%, the highest in its history. This year, the rate expected to be around 70%. Hence, it doesn't expect a major boost in its penetration rate this year, signifying stagnation.

Apple to spoil the party

Now, considering the advent of Apple's CarPlay, this stagnation can soon turn into a decline. CarPlay is a rebranded version of iOS for automobiles. Apple is looking to revolutionize in-car infotainment with this venture. Ferrari, Mercedes-Benz and Volvo (OTCPK:VOLVY) have already started shipping CarPlay-enabled cars. Going forward, Apple is looking to bring Honda (NYSE:HMC), Hyundai (OTC:HYMLF), Jaguar, BMW (OTCPK:BAMXY), Chevrolet, Ford (NYSE:F), Kia (OTC:KIMTF), Land Rover, Mitsubishi (OTCPK:MMTOF), Nissan (OTCPK:NSANY), Peugeot-Citroën (OTCPK:PEUGY), Subaru, Suzuki (OTCPK:SZKMY), and Toyota (NYSE:TM) on board.

Considering Apple's brand equity and its highly-acclaimed user interface, it won't come as a big surprise if it poses serious threats to Sirius' business. However, there are some positive factors regarding Sirius XM that deserve a mention.

Few positives

Sirius has increased its penetration through its healthy relationship with Nissan to fix satellite radios in all of its models through 2018. In addition, Sirius' content and easy to use service are expected to drive demand at OEMs and customers across the world. There are around 60 million vehicles on the road today with factory installed satellite radio, and the company expects this number to almost double as satellite-enabled vehicles are projected to increase to 110 million going forward.

The company is moving forward aggressively with its key strategic initiatives such as offering customers free abbreviated trials. These initiatives are expected to attract used car market dealers and owners. Further, Sirius expects sales in the pre-owned car market to double in the next few years and exceed sales to new cars. Sirius ran about 13 million total trials in 2013, and anticipates hitting more than 15 million trials in the current fiscal year.

On the top of it, Sirius XM recently launched NBA Radio and relaunched one of its PGA Tour radio channels with pros like Ben Crenshaw. In addition, Sirius is trying to get hold of superstars like Katie Perry, Eminem, Lady Gaga, Pearl Jam, Mike Tyson, and the cast of Downtown Abbey in order to bolster its presence.

Valuation and takeaway

These moves indeed look very positive. However, a look at Sirius' valuation doesn't make it a good buy. Sirius shares currently trade at a trailing P/E of 52. This is pretty high considering Sirius' earnings have actually declined at a CAGR of 17% in the last five years. Moreover, Sirius has a massive debt load of $3.60 billion, while its cash position is puny at just $138 million. Hence, potential competition from Apple can further hurt its earnings performance and restrict Sirius' ability to service its debt in the long run.

Source: Don't Buy Sirius XM Going Into Earnings