Recently, I have been reading several articles challenging Sirius’s (NASDAQ:SIRI) ability to survive and grow in these tough economic times. As Sirius’s future seems to be a popular and controversial topic, I am interested in taking an objective look at this company.
Overview: Sirius is the leader in the satellite radio market. Its operations are based in the United States and Canada, where it provides 69 streams (channels) of music and 65 streams of sports, news and entertainment to listeners. Sirius subscriptions range in price from US$12.95 monthly (US$8.99 for each additional receiver) to US$499.99 for lifetime (of the receiver equipment) subscription. SIRI now expects to add 1.6 million net subscribers this year, up from its earlier forecast of 1.4 million net additions. At present it currently has over 21 million subscribers.
Balance Sheet: I would say that SIRI has a somewhat mixed balance sheet that is heading for improvement. SIRI has a market cap of about 6.5 billion with 3.75 billion shares outstanding. It has a strong growing revenue and cash flow. This has led to a gross profit of 1.30 billion (ttm). However, where everyone seems to focus is on its outstanding long-term debt obligations. Presently Sirius’s debt sits at 3.02 billion. The debt to equity ratio is an ugly 10.36 and currently higher than the industry average. However, we have to look at what all this debt has bought it: A fleet of 5 satellites which allows it to broadcast some of the highest valued exclusive content on the market. It is the industry leader with very little actual competition. I know that all of the bears of Sirius will claim that Pandora (NYSE:P) is the greatest thing since sliced bread, but as I will show the facts simply can’t be ignored. Sirus trades a very high multiple, with a trailing P/E of 42.93 and a forward P/E of 22. It is also very volatile when compared to the market with a beta of 2.27.
Q2 2011 Earnings: Sirius announced its second quarter earnings on August 3rd, 2011. It was generally observed as being a very strong and profitable quarter. SIRI beat analysts’ estimates on EPS by $0.02. It had a slight miss on the revenue side by posting 744 million against 752.6 predicted by the analysts. The increase still represents 6% revenue growth from a year ago. Another positive sign was the addition of 450,000 new subscribers. Sirius also raised guidance of full-year subscription additions to 1.6 million up from the previous estimate of 1.4 million. It also provided the statistic that 65% of all new cars rolling off US production lines are equipped with Sirius XM. Seeing that 2/3 of all new Sirius subscribers come from new car owners, this strategy is proving immensely effective. This being coupled with its internet streaming and new smart-phone apps proves this was a fantastic quater for Sirius.
Competition: As I mentioned earlier, SIRI’s main competition seems to be coming from the internet radio providers, namely Pandora. This is a point of major contention between the SIRI bears and bulls.
The bears see internet radio as the future, as it will become widely successful as wide area networks become prevalent on our highways. Their feeling is that Pandora will be able to beat Sirius out in this competition by providing free internet streaming radio.
The bulls' opinion is that Pandora is more of a gimmick and that internet radio is not a real threat to satellite radio. The main reason is that Pandora, or for that matter anything free, will never be able to match the exclusive content that Sirius is able to provide. Many also argue that with Sirius moving into the smart-phone arena through the developement of apps, it will be well positioned to fend off Pandora when wide area networks become available on highways. Also, some bulls will point out that cell phone carriers are moving away from unlimited data, and so internet streaming could become financially unpractical. Finally, Pandora is not even within the realm of profitability yet while Sirius is generating a solid gross profit.
Future Outlook: If you have been following the markets and economic indicators lately, I don’t see how you can have a very positive view of the economy moving forward. A wise investor once said that a rising tide raises all boats. The inverse of this is certainly true as well. If the economy goes in the tank, auto sales will take a hit, and that will negatively affect Sirius' subscription growth. However, I am of the opinion that Sirius will survive this period of economic melodrama just as it did in 2008 and will emerge on the other side stronger and ready to grow once again.
Starting in 2012, Sirius will finally be able to raise its primary rates to subscribers. This movement had been previously blocked by provisions of their merger with XM as well as class action law suits. This needs to be done carefully but will most certainly help SIRI’s bottom line. I hope with this extra revenue it will begin to pay down some of its debt obligations.
Sometime in the not too distant future Sirius will release Sirius XM 2.0. This new software will increase its capacity load by 25 satellite channels. According to its Q2 earnings call it also plasn on "employing connectivity technologies such as WiFi, Bluetooth and the Internet to create exciting complements to our core radio services." Many people are claiming that 2.0 will be a game changer that will also have Pandora-like personalization features. This is a fantastic article that really lays out the recent revelations that Sirius has made about 2.0.
Analysis: I view Sirius as a long-term speculative play at this point. I am looking for this stock to provide a very solid return in the next 2-5 years. For investors who are interested in getting into SIRI you may want to wait and see the track that the economy takes. I assume that with real interest rates set to remain in negative territory until at least 2013, we will be kept out of recession and on a path of long-term low growth rates. However, I think Sirius is a very solid company with very little real competition. This is why I view any potential slide in the stock as an opportunity to pick up some shares at a lower cost. I believe that Sirius XM could potentially make a very valuable addition to the long-term speculative section of an investor’s portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.