I’ve been an investment professional for more than 30 years and was able to enjoy some interesting experiences. I published two books. I’ve been quoted by reporters more times than I can count. I’ve gone myself in front of CNBC and Bloomberg TV cameras at various times. I attended an old-time Drexel-Burnham junk bond “Predator’s Ball.” I’ve been hoodwinked by Chainsaw-Al Dunlap. Etc., etc., etc. But finally, last week, I really and truly arrived!
Howard Stern read sections of the bullish stock feature I wrote about Sirius XM Radio (SIRI) for my Forbes Low-Priced Stock Report on the air earlier this week and even gave a sort-of thumbs up by telling the world “I’m with f****** Gerstein!” He, of course, took his obligatory shot, suggesting that my first name ought to be Chaim. Sorry Howard, my Hebrew name is Tzvi, but I still love you . . . and, of course, Sirius.
Although I’ve been a Stern fan for decades, I haven’t always liked Sirius' stock. If you search Seeking Alpha for some of my old articles, you can find some pretty critical pieces from the mid-2000s. My concerns were those shared by much of the investment community: a breathtaking amount of debt, uncomfortably high subscriber churn, ridiculous levels of spending to attract on-air talent (including Howard) and customers, and a death-battle between Sirius and rival XM Radio that seemed likely to continue to split the market, drive costs higher and prove every bit as destructive as the circa-1960s battle between the National Football League [NFL] and American Football League [AFL].
Pro football didn’t die. The AFL and NFL merged giving the surviving NFL entity an opportunity to stake a claim to being the hottest, wealthiest, league in pro sports. What a difference a merger can make.
Satellite radio likewise hasn’t died, despite even a devastating recession that pounded auto production which could have been catastrophic, because most satellite radios are still installed in cars. Sirius and XM merged and, given an opportunity to stop fighting one another, they were able to rationalize their operations, start boosting cash flow and reducing the need for external capital, and satisfying customers to the point where churn has come way down.
Let’s consider some numbers:
- In 2010, revenues rose 14% to $2.8 billion.
- Gross margin, at deficit levels in the early pre-merger days, was 61% in 2010, up from 57% in 2009. The operating margin, still in the red (albeit modestly so) in 2009, was plus 12.3% in 2010.
- GAAP net income (this means I’m counting all the non-cash items media companies and analysts wish investors would ignore) came in at plus $43.1 million.
- Cash from operations, $433.8 million in 2009 and $512.9 million in 2010, has been above capital spending ($248.5 million and $311.9 million respectively) for two years.
- Cash, $380.4 million at the end of 2008, now stands at $586.7 million.
- There are no significant debt maturities until 2013, and given the company’s transition to positive cash flow, it seems likely to assume these can be pushed outward if desired (heavy, and perennially outstanding, debt is commonplace in media).
- Sirius’ penetration in new car sales rose from 55% in 2009 to about 60% in 2010, and we may be in the early stage of a new vehicle up-cycle.
- The churn rate (data as of mid-2010) for Sirius was 1.8%, comparable to DTV (1.5%) and Dish (1.8%), and well below Netflix (4.0%) and HBO/Showtime/Starz (4%-5%).
The stock is not, by any means, a value candidate, but I have to assume nobody was mistaken on this point. It trades at 32 times estimated 2011 EPS (versus a broadcast median of about 14) and a price-to-trailing 12 moth sales ratio of 2.54 (versus a 1.35 industry median). Although not cheap, these metrics are not the sort of over-hyped levels we see and have seen elsewhere nor are they beyond the sort of measures Sirius can plausibly be expected to grow into. Indeed, Sirius should be valued more richly than an industry median filled with low (or zero)-growth local broadcasters and terrestrial radio companies.
Even so, Sirius remains very much a work in progress rather than a finished product. It still needs to boost non-automotive subscribership. But it’s moving in the right direction. Making itself available via internet (on computers or on tabletop radio that pick up internet signals) was a big move in this direction in that it opens Sirius up to non-drivers who don’t want to be bothered with fancy satellite hookups. Mobile apps (for Apple, Android and Blackberry devices) represent another step in this direction.
Speaking of internet, we do, of course, have a new class of competition in Pandora (The Feds were right to see Sirius XM as not being a monopoly) with its personalized music service. Clear Channel (OTCQB:CCMO) is likewise moving into personalization).
Sirius likewise plans to get into personalization, with Sirius 2.0, due out later in 2011.
Frankly, though, I’m not convinced personalization is as serious (pun intended), an issue as many assume. It’s not at all new. An outfit known as Launch.com did it a while back, and Yahoo, which bought Launch, still offers it. I found it intriguing for a few weeks, but quickly lost interest and hadn’t logged into it for years until a couple of weeks ago, just to see if it was still there and to compare it to Pandora (which captivated me for about five minutes). I actually liked Launch/Yahoo better (I prefer a general-purpose personal classical music station rather than a Mozart channel, a Vivaldi channel, a Haydn channel, etc. which quickly drove me crazy) but to be honest, if I really need personalization, I have a very well-stocked iPod with lots of perpetually changing playlists. Given that Launch/Yahoo went pretty-much nowhere, I suspect many others feel as I do.
Although internet “product” people and commentators salivate over personalization the way a dog salivates over a steak, and web users find it useful in spots (I assume most of us have set up on-line portfolios or watch lists somewhere, and possibly personal home pages), I’m not sure it’s really the be-all and end-all of life. When it comes to entertainment, we already have devices that give us total control. Even so, there’s still something to be said for just tuning into a well-programmed station and accepting what comes (possibly even exposing us to new ideas for our iPod playlists). Terrestrial radio has shown itself to have problems with the concept of “well-programmed” but so far, Sirius seems to be doing fine (judging by it Arbitron-calculated, as of late-2009) 71% vehicular listening share, versus 17% for AM/FM (the rest being split between CDs and other devices).
Still, one should make no mistake about the fact that Sirius is still a high-risk investment. But I can’t imagine there’s any serious investor out there who is under any illusions on this score. So let’s not compare Sirius to Procter & Gamble (PG), or even Apple (OTC:APPL). I evaluate Sirius in the context of the high-risk high-potential-reward universe I follow for my newsletter, and in this context, chose to feature Sirius as a candidate for long-term, home-run potential.
Anyway, at least Howard Stern is with me!