Sirius XM (SIRI), the granddaddy of all satellite radio, is facing an uncertain future. Its long time CEO, Mel Karmazin, will step down in February 2013, ending the era of growth and survival under his reign and there is competition on the horizon that may disrupt Sirius' position at the top of the subscriber heap.
Sirius has approximately 22 million subscribers. Sirius has shown strong subscriber growth mainly due to strong auto sales and its deal to provide free satellite radio in all new Ford (F) models. The retention of these figures is somewhat in question as few new car owners actually subscribe after the free trial period is over. It can expect to continue to achieve growth from this area as long as auto sales remain brisk.
Mr. Karmazin sounded ecstatic on a recent conference call for the company's third quarter earnings. He noted an increase of 446,000 subscribers during the third quarter, with a 14% year-on-year increase in revenue to $867 million. The company's adjusted earnings shot up 24% to $245 million, resulting in $556 million in cash at the end of the third quarter. Estimates from analysts reveal they were expecting no change from the actual earnings from the same period last year. Analysts were projecting profit to rise by 514.3% over the same quarter last year. These same analysts were projecting a rise in revenue of 13.6% from a year earlier. All of this is good news for a company that had to secure a loan from Liberty Media (LMCA) three years ago to avoid bankruptcy.
Liberty converted its preferred share holdings to 32% of the common shares in Sirius raising its ownership level to 46%. Reports have Liberty Media asking the Federal Communications Commission for permission to exercise effective control over Sirius. The FCC has called for public comment on Liberty's application for approval to take control of Sirius. Liberty Media has sold off its Starz LLC holdings in order to free up cash to exercise its option over Sirius. Liberty Media currently trades around $112. It has a 52-week low of $64.20 and high of $114.19. It has a price earnings ratio of 18.81 and earnings per share of $5.72.
Mel Karmazin is stepping down in front of Liberty's acquisition. He has been selling stock recently and was probably doing so in anticipation of Liberty exercising its option. He made some very difficult decisions three years ago to keep the company afloat and is exiting when the conclusion to that loan agreement no longer fits with his leadership imperatives. The outcome of his departure was met with a positive response from the market, the shares trading up almost 30% from pre-September prices. During his tenure, the stock has dropped from around $9 to its current levels of around $2.80. Regardless of the cataclysmic market meltdown and recession during this period, he can't catch much of a break in the review of his performance as CEO. The deal he made with Liberty has been bad for his tenure, but it might be great for the company and its shareholders.
Pandora (P) is another player in the satellite radio space. It offers personalized, unlimited access to free music and programming as well as paid subscription services. This company has approximately 47 million active users. Pandora also garners revenue from audio and video advertising products for computer, mobile and mobile device platforms.
Rumors of Apple's (AAPL) entry into the Internet radio market have caused havoc with Pandora's stock. It has dropped 40% since the rumor has been circulating in the last couple of months. Pandora's shortcomings are the limited amount of time a user can listen to a song, also listeners must wait through a lot of music they don't want to hear to listen to what they do want to hear. Apple's new Internet product is rumored to allow the listener to listen to the content selected as opposed to a pre-determined playlist. Whether or not this will have a huge impact on Sirius is hard to say. Sirius has made more of a name having hosting personalities, such as Howard Stern and several other talk radio programs, the music programming is almost a secondary consideration to its overall survival.
By contrast, Cumulus (CMLS), is a owner and operator of 570 commercial radio stations in 120 markets in the U.S. It sells local, regional and national advertising for broadcast on its stations. Cumulus' stock trades around $2.50, has a year high of $3.95 and a year low of $2.08. It has a price earnings ratio of 38.31 and earnings per share of $0.07.
Cumulus' year on year quarterly earnings growth is 507.2%. Pandora has no published quarterly earnings growth year on year but it has a negative return on equity of -33.41%. Cumulus has a return on equity of 97.13%. Sirius has year on quarterly earnings growth of 1,708.3% and a negative return on equity of -151.61% as a result of its debt situation.
Cumulus has $19.08 million in cash, debt of $2.08 billion. It has a current ratio of 2.77 and a book value per share of $1.69. It is 91.10% held by institutions and 9.01% owned by insiders. The float is 12.05% short. Despite its measurable, traditional and successful business model, and steady revenue growth, retail investors should be very cautious about an investment in this stock. The percentage ownership in the hands of interested parties is way too high. However, it is tempting based on the fact that it is trading below book value.
Pandora trades around $8.40, has a year high of $15.97 and low of $7.83. It has negative earnings per share of -$0.20. It does not pay a dividend. It has total cash of $82.3 million and total debt of zero. It has a great current ratio of 1.91 and a book value per share of $0.56. The stock is 31.21% owned by insiders and 65.7% owned by institutions. Curious that 96.9% of holders are in a stock that is over 50% short. I expect that there is some room for this stock to increase from here on short covers alone. That being said, retail investors should be wary of the fact that it has such a large holding by institutions. Zero debt is a big attraction to this stock in the long term. I think it will have the ability to compete with Apple and any other players like Google (GOOG), Microsoft (MSFT) and Yahoo (YHOO) that may also enter the Internet radio space now or in the future.
Sirius has total cash of $868.33 million and total debt of $2.88 billion. Its current ratio of 0.96 is concerning as it falls short of its ability to fully cover current liabilities as they come due. It has a book value per share of $1.05. The shares have a 52-week range of $1.53 and $2.70. The P/E ratio is 4.93 and the earnings per share are $0.54.
The float is 37.85% owned by insiders and 39% owned by institutions. The float is 7.4% short at October 15, 2012 down from 8.10% short as at September 14, 2012. With Liberty Media making its intentions clear and the departure of Mr. Karmazin, the market is liking this stock a little better. Liberty's conversion into equity will take some of the weight off the debt situation but it is always going to be a concern going forward.
Sirius is an interesting stock in an interesting space. I have always wondered how satellite radio companies will continue to thrive in a hostile macro-economic environment with a premium pay service that was, since the 1920s, free to the user. Sirius will have to compete with Apple and any other entrant to the market for a subscriber base that is willing to pay a premium for service. It will still have to compete with traditional media for compelling content. Whether or not Liberty Media, being at the helm, makes content its king and can expand the subscriber base with that content remains to be seen. The market likes this stock better than it did a month ago, and third quarter earnings are turning out to be better than expected. I think Sirius has some room to improve price wise. I think the stock will head above $3 later this year and possibly top $3.50 or $4 by mid 2013.