Sirius XM: High Cash Flow, Low Share Price?

| About: Sirius XM (SIRI)

Sirius XM Radio (SIRI) is one of the most discussed and most puzzling stocks around these days. Its business is booming and its revenues keep increasing in a very bad economy. Yet Sirius's share value remains low despite all the cash the company is generating.

On August 3rd, 2012, for example, its shares were trading at a dismal price of $2.16. That's better than the less than $1.30 prices we saw in June, but the share value is low compared to the company's revenues. Forbes is currently projecting Sirius revenues for the second quarter of 2012 to be $833 million, which is 11.9% higher than revenue for the same quarter last year.

Sirius is also in a very strong position as regards to cash. The company has so much cash that it is actually in position to retire $186 million worth of debt. A press release indicated that the company will redeem all of its Senior Secured Notes on September 1, 2012. That means a lower debt load, fewer interest payments, and more cash flow in the long run for Sirius.

Sirius's market share is growing, and so is its ability to actually generate cash from subscriptions. Its core market in the automotive industry is growing, and it is in a good position to enter the potentially lucrative digital market as well. More importantly, it has a lot of cash on hand, which value investors are supposed to like. Unlike its main competitors, such as Pandora (P), Sirius actually generates revenue from its business model.

Sirius Still Doing Better Than Pandora

Yet none of that has been able to truly boost share price. Pandora, which has never been able to demonstrate that it can actually generate income, was trading at $9.46 a share on August 3, 2012. Pandora's expenses and losses still exceed its revenue. The Associated Press reported that Pandora lost 12 cents a share in the first three months of 2012. Forbes predicted that Sirius will earn 2 cents a share in the second quarter.

Sirius's share price is in line with some other radio companies, including Cumulus Media (CMLS). On August 3, 2012, Cumulus's share price was $2.65. Yet, like Sirius, Cumulus generates actual revenue from advertising and it does not have high expenses in the form of music royalty payments like Pandora does. Other radio operators, such as CBS (CBS), have higher values, but only because they only own other assets, such as TV stations and networks.

So why are Pandora shares worth almost five times as much as Sirius? One possible reason is that a "digital" stock like Pandora is sexier than a company that puts radio sets in cars. Another is that Sirius has a really complex business model that's hard to understand. Pandora is actually fairly easy to comprehend. It sells one product, namely digital music.

Takeover Drama Hurts Sirius

Then there's the takeover battle between Sirius's current management team, led by Mel Karmazin, and John Malone's Liberty Media (LMCA). The conflict between them, which has caused Karmazin to sell off huge blocks of Sirius's stock, has certainly driven down share prices. The lowest Sirius prices in May coincided with Karmazin's stock dumping.

Sirius's share price has crept back up a little since the Karmazin and Malone feud has cooled down, yet the huge amounts of stock that Karmazin could start dumping on the market at any time seem to be scaring investing away. Some analysts think that Karmazin could still have as many as 32 million Sirius options left. Many people, particularly value investors, don't want to risk their money if Mel could pull the rug out from under Sirius's share value at any time.

The takeover battle at Sirius is an interesting one because its basis seems to be Karmazin's ego more than anything else. Malone has even come out and said he'd like to keep Mel on the job as Sirius's CEO. Unfortunately, Mel has made it clear that he won't work for anybody else.

So does that make Sirius a good buy for value investors? The company has a good business model that generates lots of cash. It has also demonstrated a strong growth potential in a segment with a lot of competition. The main factors driving down its stock values appear to be concerns that are unrelated to its core business, namely the drama between Malone and Karmazin, which does not affect the actual business.

The answer is maybe, because no one knows how the Malone/Karmazin battle is going to turn out. It looks like Liberty will get control of Sirius sooner or later because it owns around 46% of the company's stock. It also looks like Karmazin will walk out the door the moment that happens.

Stock Doesn't Reflect Cash Flow

That should not affect Sirius's revenues or cash flow because its basic business model will remain the same. Malone is not going to damage a company that generates a lot of cash. He has also made statements that seem to indicate that Sirius will be spun off as separate company, rather than be folded into Liberty.

Sirius should continue running just like it has been and generating revenue. The only difference will be that a new management team is in charge, yet that might not translate into an opportunity for value investors in the short run. Share values will remain low because of the uncertainty surrounding the takeover and possible selloffs by Karmazin and others.

That makes Sirius a moderate risk, but an interesting one because it could lose share value while still generating a profit. Persons that can afford to hold it and wait a couple of years might see a nice return because Sirius is generating revenue. Its cash flow from subscription income should keep going up, even if its share values don't.

This may not make Sirius a bargain because there's a good chance that its shares will go lower as the Liberty takeover gets closer. That means it is still possible to lose money on a company that's generating a strong cash flow.

If you can afford to lose some money in the short term, Sirius is definitely worth a look. If the stock's margin value ever started to reflect its leveraged profits, the shares could rival Pandora's current price. Unfortunately, that could take a couple of years because of the current climate.

If you grade your stocks by cash, Sirius is certainly a great buy. The company has revenues that are growing at a nice rate. More importantly, the market seems to be ignoring those revenues and instead looking only at the share value. That, of course, makes for a classic value stock.

Yet Sirius may not be a value stock because it could potentially lose a lot of value. If Karmazin sells off his shares or Liberty calls off the takeover, its margin value will fall. That means shareholders could lose money on it in the near future.

The best time to buy this stock would be when, or right before, the Liberty/Karmazin rumble ends. Once that drama is over, Sirius's stock values should start reflecting the company's true value, which is higher than the market value. Unfortunately, it will be several months before we get a definitive decision on Sirius's future. Until then, this stock will be generating a lot more discussion than opportunity for investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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