Sirius Is Still Its Own Worst Enemy

Includes: FORD, SIRI
by: Satwaves

By Brandon Matthews

Forget Internet and Commercial Radio. When it comes to Sirius XM Radio (NASDAQ: SIRI) these days, the greatest threat seems to come from within. With the current year coming to a close and Howard Stern inked for five more years, I had expected to hear an update that included 2011 guidance by now. Instead, the analyst community continues to be faced with uncertainty, and the stock continues to languish in a tight trading range.

While the company boasts of better contract terms and lower costs, the details of renewed contracts are being withheld from investors and analysts. Just this quarter alone, Sirius XM renewed two of its biggest contracts with Howard Stern and the NFL, and signed Dr. Laura as well. All of the details of which have been withheld from the owners of the company. This creates a problem for analysts in that they cannot accurately model forecasts without an accurate cost baseline.

In lieu of a lack of company guidance, investors are left to rely on hope and blind faith until costs can be estimated somewhat accurately. So much confusion is being created in fact, that The Street.con is once again erroneously naming Sirius XM as a potential bankruptcy candidate, confirming its lack of knowledge with regard to Sirius XM’s capital structure and basic fundamentals that are already known. Faith and hope certainly have their place as witnessed by the two year chart above. And yes, I selectively chose a two year chart because Sirius XM as it exists today, did not exist prior to that date.

Sirius XM investors enjoyed a very good year, which was abruptly halted a little over a month ago when the company failed to issue guidance past the current quarter. Adding to the pressure was an ill timed insider sale, a reported filing by one of Sirius XM’s largest institutional investors which to date has not been confirmed, and even Liberty Capital’s Greg Maffei suggesting the stock reached an overvalued level as it neared $1.60. With Liberty Capital potentially being just three months away from increasing its stake in Sirius XM, that’s not all that surprising. What is surprising, is the complete lack of respect the stock continues to be given.

Previously, I took on the task of explaining why enterprise valuation arguments regarding Sirius XM are invalid. I’ve recently seen some even more ridiculous opposition to Sirius XM based on a perceived high P/E ratio. Here’s a clue to those making that argument….Sirius XM never had a P/E before. While you ponder that, let me get to the crux of the problem.

With Sirius XM, the only valid argument ever made is in regards to its debt and ability to pay off that debt. Sirius XM has been able to restructure its debt, which now carries with it much lower costs. The now manageable interest payments have improved the companies cash flow, to where it is now generating positive earnings. While the company may seek to further restructure its debt to improve cash flows even more, given the upgrades by Standard & Poor’s and a low interest environment, investors would be better served by the company choosing to build its cash reserves instead.

This quarter, Ford (NYSE:F) introduced the world to the concept of being “net debt positive.” I suspect this concept will become very popular in 2011 and 2012, and will be a catalyst for the stock of any company that can find its own way out of debtors prison. Back in April of this year (2010), Sirius XM’s debt maturity schedule looked like this:

click on charts to enlarge

The 2013 debt tower of 1.3 billion dollars was a monumental roadblock facing Sirius XM. The current debt picture which consists of much lower interest expenses, looks like this:

The debt is now manageable, yet remains a roadblock to the equity growth potential. Sirius XM is looking at a two year window to grow free cash flow sufficiently, to pay off the 2013 debt specifically. Everything besides the 2013 debt can be refinanced and prolonged well into the future if the need arises.

This is the reason that reductions in capex are focused on so much going into 2011 and 2012. Those reductions in capex will be applied to servicing debt. In building cash, Sirius XM’s enterprise value will also be reduced, which would warrant a higher stock price, even with assumed multiples unchanged.

This is why it is so important for Sirius XM to give guidance, or details of renewed contracts. Free cash flow is what the stock will be judged on. Free cash flow cannot be estimated if costs are not known. I believe the street has faith that Sirius XM will meet these challenges without issue. All the street needs however, is a push from Sirius XM in the form of guidance or transparency.

Disclosure: I am long SIRI.