I have often been asked about why I focus so much on the negatives of the stocks I own and write about. My answer is that negative surprises tend to be more damaging to my portfolio than unexpected positive developments. Besides, if investors want the good news about a company, most of the time the company's management will highlight all the positives an investor might want. A classic case is Sirius XM Holdings (NASDAQ:SIRI).
The company recently held its annual meeting. During that meeting management put up slides (which can be found on the company's web site) that highlighted many of its excellent accomplishments. The first slide was titled "Competitive Strengths" and listed the following:
- Large subscriber base with consistent and predictable cash flows
- Complete in-car service provider: audio, traffic and connected vehicle services
- Satellite delivery system with seamless continental U.S. coverage
- Over 140 channels of curated, commercial free music, talk, news and sports content
- Long term agreements with OEMs; factory installed in approximately 70% of new cars
- Approximately $6 billion of gross NOLs
Ignoring whether or not Sirius is a "complete" provider of connected vehicle services, this slide summed up many of the positives from both an investor and subscriber perspective.
The next four slides were bar charts showing the growth in subscribers, revenue, adjusted EBITDA and free cash flow from 2009 through estimates for 2014. Each of these charts showed successively greater numbers each year. However, as I noted, the company is putting on a show and is putting its best foot forward. How was it doing this?
It started out with subscribers, which had grown from 18.8 million in 2009 to 25.6 million by the end of 2013 and are expected to grow to ~26.8 million by year end 2014. That's really nice growth, although the growth rate has moderated lately, and unlike the next three slides, the company chose not to show the Compounded Annual Growth Rate or CAGR. It calculates to about 7.3%, including less than 5% in 2014.
Those next three slides all showed CAGR as follows:
- Revenue CAGR of 10% since 2009
- Adjusted EBITDA CAGR of 24% since 2009
- Free Cash Flow CAGR of 43% since 2009
The numbers are outstanding. Unfortunately, the market prices stocks on where growth is headed, not where it has been. The projected growth numbers for 2014, while solid, are not nearly as strong as the historical growth shown on those charts. The 2014 growth rates, based on the numbers in the charts, are revenue at 5.3% vs. the 10% since 2009, adjusted EBITDA at 18.4% vs. the 24% and the free cash flow at 18.7% vs. the 43%.
Quite frankly, historical CAGR is a useless measurement if it is not indicative of future growth. But what about some of the other growth rates that were not even covered? Specifically, the Average monthly Revenue Per User or ARPU? In 2009 it was $10.95. In 2013 it was 12.27, a total increase of $1.32 or 12.1%. And, that's despite an increase in the basic monthly subscription rate from $12.95 to $14.99, or 15.8% and the imposition of a Music Royalty Fee that added $0.97 to ARPU in 2013.
Is the lack of growth in ARPU important to investors? Should it be? The answer is that it is a data point, and it should be used in the context of all of the measurements an investor uses to evaluate the company as an investment. And, it's not just ARPU.
If the company stops reporting or stops focusing on certain figures, ask yourself why. Be skeptical. On the slide labeled "Key Operating Metrics" that compared Q1 2013 to Q1 2014, ARPU, conversion rate and customer and service and billing expense per subscriber are all missing from the presentation. These metrics have all been detailed for years in the company's annual and quarterly reports.
The company probably saw no need to report them as they fail to highlight strong performance. The conversion rate has been 42% for the past two quarters. This followed annual conversion rates of 45.4%, 46.2%, 45%, 45% and 44% from 2009 through 2013. Customer service and billing expense per subscriber is a number that has been on the rise. From $1.11 in 2008, it fell to $1.05 for 2009, $1.03 in 2010-2011, and rose to $1.07 in 2012-2013, with the first quarter of 2014 reaching $1.09 (down from $1.11 in Q1 2013).
Do you remember Sirius hiring a popular Hispanic radio personality last August? Do you recall CEO Jim Meyer pre-announcing that Sirius would be offering a low $5.99 per month fee for a suite of Hispanic targeted programming at a September conference, or the press release in October detailing a free trial for that content? Did you remember that those trials ended in February? Have you ever wondered why we haven't heard anything further about the program? I doubt the silence was due to the program being a huge success. And if it wasn't a success, what does that indicate about future growth potential?
And none of this addresses issues about increasing competitive choices in the car's dashboard. Or the overhang of Liberty Media (LMCA), the majority owner of Sirius and whether it will make another merger offer. Or the risk of Sirius not succeeding in connected vehicle services.
Are these reasons to sell the stock? Are they reasons to temper growth expectations? Again, these are decisions that each investor must make based on their own expectations about where the numbers will be in the future, and how they balance risk and reward and their investment time horizon.
There are a lot of reasons to invest in Sirius. Management will tell you all about them through press releases, at numerous analyst conferences and during conference calls. If you want to understand more about the risks associated with your investment, you need to dig a bit deeper. Those risks will be there regardless of whether someone writes an article about them and they will be there whether you want to read about them or not.
Maybe all the risks are already built into your estimates. Maybe you will decide they are trivial and will choose to ignore them. It's your choice. However, it is hard to understand how reading about risks will make you a less successful investor.
Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have $3.50 and $4 January 2015 covered calls written against a portion of my SIRI positions and will also frequently trade shares of Sirius.