When investors look at Sirius XM Radio's (SIRI) income statements, they would likely conclude that Sirius is a fast growing company with an improving cash flow. Sirius had been losing money throughout the last decade, until it finally turned a profit in 2010. In 2011, the company grew net income to $427 million, which was a nearly 1000% increase from net income of $43 million in 2010.
The primary reason that Sirius has been able to increase earnings is due to a big increase in the number of its subscribers. Sirius currently has 22,297,420 subscribers, of which 18,208,090 are self paying subscribers. Sirius has 4,089,330 promotional/trial subscribers. Promotional subscribers are temporary subscribers that the company hopes to convert into self paying subscribers. At the beginning of 2012, Sirius predicted that it would add 1.3 million new subscribers in 2012. However in the first quarter the company exceeded expectations and added 404,596 subscribers of which 299,348 were self paying subscribers. As a result of the above expected new first quarter subscribers, the company increased its estimate for new 2012 subscribers to 1.5 million. The 299,348 increase in first quarter subscribers was a 148% increase from the first quarter of 2011. During the first quarter, the company added 105,248 promotional subscribers. The company has been converting about 45% of its promotional subscribers into self paying subscribers.
The primary catalyst that is driving subscriber growth is higher U.S. auto sales. Most of Sirius' subscribers purchase subscriptions through original equipment manufacturers like General Motors (GM) or Ford (F). Mel Karmazin, CEO of Sirius, said "The consensus expectation for full year 2012 auto sales has climbed to about 14.3 million today from 13.7 million when we gave our initial guidance in February. This provides nice momentum for our growth this year, and we are also benefiting from our efforts in the used-car market. This year, we anticipate adding approximately 1 million self-pay additions to Sirius XM from our rapidly growing used-car market channel." Sirius has raised its prices on 35% of its self paid subscriber base. Mel Karmazin had this to say about the price increases: The positive reaction to the price increase has clearly exceeded our expectations. No one likes to raise prices, especially when competing against free services like AM, FM and IP radio."
In the first quarter, Sirius achieved revenues of above $800 million and EBITDA of $200 million for the first time. Despite the good news, the stock price of Sirius has decreased by 4.7% over the last 52 weeks and has increased by only 9.6% since the beginning of the year.
Sirius Stock Performance
Now that Sirius has finally become profitable, and has begun to pay down debt and increase free cash flow, investors might wonder why the stock price has not rallied. Well there are a couple of reasons.
The primary reason that the stock price has not moved higher is due to Liberty Media (LMCA) and its Chairman John Malone. Liberty has a market cap of $11.1 billion with a stock price of around $101. Liberty made a large purchase of Sirius stock in May, and now owns 46.2% of Sirius. The May stock purchase added credence to the persistent rumors that Liberty wants to take control of Sirius. It seems that John Malone and Mel Karmazin have different ideas about the direction that Sirius should be headed. On July 23rd "Liberty Chairman John Malone says Sirius needs to invest in developing the "next generation or two of (its) service," including the Internet version, and on globalizing. Malone also says he wants Sirius to use its substantial cash flow to return money to Liberty. Mel Karmazin wants Sirius to pay down debt and wants to resist any takeover maneuvers by Liberty. I believe that Liberty's involvement with Sirius has negatively affected the stock price in two ways.
1. Investors do not like uncertainty, and rumors about a Liberty Media take over have definitely caused uncertainly.
2. Some investors think that buying stock in Liberty is a smart, risk adverse way to take advantage of the growth in Sirius. This line of reasoning seems to make sense because Liberty's stock price has increased by 17% since the beginning of the year.
Sirius stock has also been dampened by uncertainly over the potential capability of its competitors. While Sirius does not have direct satellite radio competitors, it does face competition from internet radio providers, free service radio providers, and mobile entertainment device providers. In the first week of July, Slacker, an internet radio provider, partnered with AOL Radio and AARP to provide Internet radio for an underserved demographic. Free radio providers such as Pandora Media (P) and Clearwire (CLWR) are also major sources of competition. Some analysts believe Sirius' most formidable competition comes from producers of mobile entertainment devices like Amazon (AMZN), which sells MP3 players, and Apple (AAPL), which sells the iPod and iPhone.
No matter how the power struggle between Sirius and Liberty works out, I think that Sirius stockholders will come out ahead. The company's revenues, earnings and cash flow are all trending higher. Since the beginning of 2012, the stock price has increased nearly 9%. If Liberty decides to purchase additional Sirius shares, the stock price will move even higher. Furthermore, competitive pressures may not be as serious as some investors think. Direct radio providers such as Pandora and Clearwire have been losing money. Indirect competitors such as Amazon and Apple may not have such a big impact on Sirius growth because of the indirect nature in which they compete. Sirius reported second quarter earnings on August 7th, beating earnings per share expectations and meeting revenue expectations. I believe that the current upswing marks the start of an extended rally.