Satellite radio companies Sirius (SIRI) and XM (XMSR) are the focus of a lengthy Barron's cover story (sub. req.) on the sector. Here are the main points from the article -- which argues XM is the better investment choice -- and some helpful charts:
● Valuation concerns: 'For companies with modest revenues and still-sizable losses, XM (ticker: XMSR) and Sirius (SIRI) have nontrivial stock-market values -- $10 billion for Sirius, $9 billion for XM... Sirius and XM shares are up more than 10-fold from lows reached in late 2002 and early 2003, when the Street questioned their financial viability.'
● Questions on sector: 'Will satellite-radio subscribers top out at 20 million, 30 million or 50 million?... Will incremental satellite subscribers prove more costly to obtain, and will currently high customer loyalty begin to decline as the services become mass-market products, resulting in increased -- and expensive -- customer churn?... Looking out a few years, new and competing technologies, like wireless-music services offered by cellular-phone companies, potentially could challenge satellite radio.'
● Positive signs for sector: 'XM and Sirius have demonstrated that large numbers of Americans will pay for something that they used to get free... Looking ahead to 2010, a significant chunk of the estimated 17 million vehicles expected to be sold in the U.S. could have satellite radio as standard equipment. Both XM and Sirius may add three million subscribers annually in the next few years... The financial beauty of XM and Sirius is that they can just as easily serve 50 million subscribers as nine million with their satellites.'
● Why XM looks better than Sirius: 'XM has almost double the number of subscribers. XM is likely to maintain its lead in the coming years because it has a stronger stable of automotive partners than Sirius, including all of the major Japanese car makers, starting in 2007. XM's partners control about 60% of the U.S. auto market...
'XM could have more than $1 billion of free cash flow in 2010, when it expects to have 20 million subscribers. With a current market value of $9 billion, XM trades at a 10%-plus free-cash-flow yield based on potential 2010 results. If XM trades in 2010 at a 5% cash-flow yield, it suggests that its stock could double by then. Sirius' cash flow is expected to trail XM's because it's growing from a smaller subscriber base.'
● Conclusion: 'It's important to recognize that there are few companies in today's stock market like XM and Sirius, with robust market values and only modest revenues. Yet both are legitimate growth stories with clear paths to profitability. Assuming that XM and Sirius stay rational and Americans don't tire of satellite radio, the two companies are apt to make good money within a few years. But given XM's edge in subscribers, automotive partners, technology and customer-acquisition costs, its stock looks like the better buy.'