Sirius XM (NASDAQ:SIRI) used to be the hot thing in town. Not anymore. The company faces fierce competition from both local terrain radio stations and podcasts on new gadgets such as Apple's (NASDAQ:AAPL) iPod/iPhone, Google's (NASDAQ:GOOG) Android and Microsoft (NASDAQ:MSFT)'s Windows based smartphones.
So is Sirius XM still a worthwhile investment? We could examine it using three metrics, all of which are related.
1. Subscriber count
In both 2010 and 2011, Sirius enjoyed an average of 8% growth the number of subscribers. If the number from Q1 2012 holds, Sirius should again have an 8% year in 2012. The following chart shows Sirius' subscriber count and growth since 2008.
(click to enlarge)
Given Sirius' business model extracts almost all revenue for subscription fee, the growth in the number of subscribers largely reflects the revenue growth. Sirius currently has a P/E ratio of 23, and a Price/Cash Flow ratio of 22. It is not very cheaply valued given an average 8% growth. At the same time, since Sirius is so heavily leveraged (almost $3 billion debt vs. $747 million cash), its enterprise value/EBITDA ratio looks reasonable at 9.73.
2. Operating cash flow
However, the growth in the number of subscribers may not be the whole story. Since Sirius has a high fixed cost structure, its profit margin increases with more subscribers to split the fixed cost. This is reflected in growth of operating income in 2010 and 2011. In 2010, Sirius' operating income increased from $228 million to $465 million (104%). In 2011, its operating income increased to $676 million (45%). This is a significant drop in percentage growth. Based on this growth, it is easy to tell that Sirius' operating income growth is linear, not exponential. At the pace of approximately $210 million increase in operating income in 2012, the percentage growth will go further down to 31%. Using a rule of thumb to take two thirds of the percentage growth in operating income as the fair-value P/E ratio, Sirius is worth a P/E ratio of 20, very close to where the stock price is now.
So the fundamental question boils down to: Can Sirius grow faster or slower than the current pace (8% increase in subscribers)? The answer to this question is related directly to new car sales, a major source of Sirius' new accounts.
3. New car sales
In both 2010 and 2011, the US automobile sales grew by approximately 10%. According to Automotive News, during the first five months, the sales grew by 13%. If 10% growth converts into 8% subscriber growth for Sirius, it is plausible that Sirius could see a slightly higher growth in 2012 to approximately 10.4%. That projects Sirius could have 24.17 million subscribers by the end of this year. It is not hard to come up with a projected operating income growth of 42%, or a fair P/E ratio of 28.
Therefore, using this projected growth, Sirius is 20% undervalued. But there is more, Sirius has been experiencing share dilution every year since 2002. Sizable dilution was seen in 2009 and 2010, but not so much in 2011. Interested buyers should certainly take this into consideration.