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After reading article after article praising and defending Sirius (NASDAQ:SIRI) as the company that will never falter, I've decided to take a peek at what all the hype was about. At first glance, Sirius appears to be a financially sound company, with solid margins and a decent cash position. Fiscal 2010 results were stellar, complete with increasing subscribers and strong revenue. But we all read the earnings transcripts so there is no need to delve into these particular numbers.

My first chart shows recent stock price movement and some technicals. When the company moves lower through the $1.68 support, the bottom will fall out. Okay, that’s a bit extreme. The point is, I don’t see much more price appreciation, especially with the resistance holding firm at $1.80ish.


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But what I'd like all you Sirius-heads to do is consider what happens when the subscribers begin to fall? SIRI can only experience so much grow from the increased amount of subscribers without raising the cost of their product at some point in future. With free radio, Pandora and other stations available for almost nothing, SIRI will eventually be backed into a corner. For starters, SIRI gets hit with $60 charge every time a new subscriber signs up. This may be a minimal expense but it's still something that each investor should keep in the back of their mind. However, my main concern is their debt. The screen below displays current outstanding issues of SIRI. They total $3.183 billion. Now, granted only a marginal amount of this debt will come to fruit in 2011, but the future issues are likely to be more of a burden, especially when subscribers peak and SIRI begins to lose money.


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With car sales still crawling up from extremely low levels, and SIRI only adding a net of about 200k in subscribers, there is little room for error by management. If margins or profitability begin to look bleak, you can bet this run up will end very quickly. At $13 a month ($156 a year) plus other costs, this product isn’t the cheapest on the market and there are clearly other substitutes. With gas prices moving north, that’s almost 3 full tanks of gas for some people. I'd easily sacrifice my pricey radio for three full tanks of gas, wouldn’t you? I can live with Z100 or 92. 3NOW on my radio during my commute to work. Additionally, ESPNRADIO, Bloomberg News, and WFAN660 are still available for free!

The chart below compares SIRI to "Bloomberg Peers." I did not construct the peers shown below, but they are mostly sound, stable companies that have been around for some time. SIRI stacks up pretty nicely in terms of market cap, and they even have a 13% estimated revenue growth. It’s the numbers/ratios to the right that have me concerned. Their P/E is 60. I don’t need to elaborate on that. There debt to equity ratio is enormous, and free cash flow is below the average of the group.


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My last chart shows insider transactions. Again, the chart speaks for itself: a lot of selling. The most recent was about 41,000 shares in the beginning of February. Now, if I was an investor and my executives sold considerable amounts of stock, it may raise a few flags on my radar. But again, take this in stride.


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A few notes before I end this write-up: I'm not intentionally bashing the company. The purpose of this commentary is to make my investors aware of their financial position, beyond what is typically being reported. Additionally I felt it was important to shed some light on the company's debt situation. Investors must gauge all aspects of a company, not just top line growth, when making an investment. The point of all this is as follows: I think SIRI is a decent company that faces strong headwinds in the years to come. I don’t see the stock moving too much higher, and certainly not past $5 a share.

Source: A Sirius Problem: A Deeper Look at the Company