Sirius XM: Buy Or Sell?

| About: Sirius XM (SIRI)
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There has been a lot of controversy surrounding Sirius XM Radio Inc. (NASDAQ:SIRI) lately, especially on this site. This brings up one simple matter; should we buy, sell, or hold this stock? I have taken the time these past couple of days to see what the buzz is all about and whether we should get in, get out, or sit tight. There is no doubt this stock had a rock solid run all the way up to $60 right before the dot-com bubble. What changed and is it worth another chance? What I will attempt to explain is whether its run is truly up, or if this is just a bump in the road.

The Buzz

Sirius XM Radio Inc. is in the business of broadcasting music, sports, news, talk, entertainment, traffic and weather channels in the United States. This company operates on fee-based subscriptions through two satellite radio systems; Sirius and XM. Subscribers enjoy this company's services through their cars, but also over the internet and through applications on Apple (Apple: AAPL), BlackBerry (Research In Motion: RIMM), and Android (Google: GOOG) mobile devices.

As of December 31, 2010, the company had 20,190,964 subscribers. In April 2010, XM Satellite Radio Holdings Inc. merged with and into XM Satellite Radio Inc, and in January 2011, XM Satellite Radio Inc. merged with Sirius XM Radio Inc. The current market price is $2.39, with a general analyst consensus for a one-year price target of $2.80. This represents a 17.15% upside potential on top of an already 45.21% 52-week return.

The Numbers:

Index - P/E 4.58 EPS 0.53 Insider Own 0.22% Shs Outstand 3.83B Perf Week -3.77%
Market Cap 9.30B Forward P/E 22.05 EPS next Y 0.11 Insider Trans 5.43% Shs Float 3.65B Perf Month -3.39%
Income 3.42B PEG 0.18 EPS next Q 0.02 Inst Own 52.42% Short Float 7.12% Perf Quarter 32.51%
Sales 3.19B P/S 2.92 EPS this Y 874.48% Inst Trans 5.08% Short Ratio 4.93 Perf Half Y 5.90%
Book/sh 1.04 P/B 2.33 EPS next Y -78.00% ROA 40.59% Target Price 2.80 Perf Year 43.49%
Cash/sh 0.23 P/C 10.71 EPS next 5Y 25.20% ROE 151.61% 52W Range 1.27 - 2.64 Perf YTD 33.24%
Dividend - P/FCF 18.13 EPS past 5Y 0.00% ROI 55.24% 52W High -8.14% Beta 2.11
Dividend % - Quick Ratio 0.94 Sales past 5Y 36.45% Gross Margin 60.07% 52W Low 90.94% ATR 0.07
Employees 1526 Current Ratio 0.96 Sales Q/Q 12.51% Oper. Margin 23.22% RSI (14) 45.83 Volatility 2.20% 2.27%
Optionable Yes Debt/Eq 0.72 EPS Q/Q 1691.45% Profit Margin 107.18% Rel Volume 1.77 Prev Close 2.50
Shortable Yes LT Debt/Eq 0.72 Earnings Aug 07 BMO Payout 0.00% Avg Volume 52.73M Price 2.42
Recom 2.10 SMA20 -4.49% SMA50 5.14% SMA200 14.51% Volume 93,441,552 Change -3.00%

The Competition:


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CMLS - Cumulus Media Inc.

SIRI's one-year EPS growth rate is 874.48%. This is substantially higher than its Broadcasting and Cable TV Industry at 47.36%. Given this information I was curious, why so much volatility with this stock?

The Good

One main factor is the expansion of the growing Ford Motor Company (NYSE:F) installation contract. This is expected to boost revenue from the OEM channel. Since late 2005, both Sirius and XM have also offered their services in Canada, through joint ventures with local partners. In Canada, Sirius hardware is also rapidly being adopted by OEMs. Most car companies come standard with Sirius radio and offer it free for the first few months. I believe this is a great feature and excellent marketing strategy. It seems to have proved successful so far and I expect the trend to continue.

When Sirius and XM radio merged in 2010, competition in the industry was virtually eliminated. SIRI recently unveiled a "Best of Both" programming offering. This was in response to the awful pricing that was available upon the merger. The company was under one umbrella, but still acted as two separate entities. The company offered an a la carte pricing plan, under which subscribers chose a combination of programming offerings from the two providers, but continued to operate as separate brands. This all changed with the "best of both" program.

Sirius XM now offers a broad programming array targeted at various listener preferences and demographic segments. Through factory-installation programs with virtually all of the leading domestic and foreign automotive manufacturers [e.g. Ford, Daimler (OTCPK:DDAIF), Chrysler (Fiat: FIATY.PK), General Motors (NYSE:GM), Honda (NYSE:HMC) and Toyota (NYSE:TM)], SIRI is ramping up in its primary auto OEM distribution channel. SIRI does not just offer in-car radio, but also a broad array of home and portable products at various retail price points. For Fiscal Year 2012, the company expects to add about 1.3 million subscribers.

SIRI's current quarter consensus estimate has increased over the past 90 days from 0.02 to 0.03, a gain of 19.0%. This improvement is significantly greater than its Industry average of -2.0% during the same time period. The stock has a four-star S&P rating with a bullish Moving Average Convergence/Divergence (MACD). The 10, 21, 50 and 200-day moving averages of $2.53, $2.28, and $2.11 also signal a bullish pattern.

The Bad

The company has a relatively limited operating history. As of June 30, 2012, SIRI had about $2.9 billion of total debt and $868 million of cash and equivalents. SIRI's significant debt load could negatively affect the stock if the company does not meet its debt obligations. Also, competition is increasing from AM/FM radio, HD radio, and streaming media services such as Pandora (NYSE:P). Competition can eat away from profits and market share if the company does not offer a "superior" product or at least a competitive price. One major concern for me is if the company is unable to renew content and OEM contracts as fast as its peers, its business will suffer.

The stock is twice as risky as the market given its beta of 2.1, and if auto sales begin to plummet again, this stock will take a nose dive, once again. CEO Mel Karmazin has projected that by 2015 over 70 million vehicles will have Sirius XM installed. The important information to dissect from this is not growth, but market saturation. Growth will eventually begin to flatten before the number of cars on the road with Sirius XM installed peaks. The customers with older vehicles will replace their existing cars with the same/existing subscriptions.


Yes the market seems saturated, yes debt is high, yes the company is the center of controversy, but NO the stock is not out. I read a lot of articles talking about the importance of virtually "ignoring" stocks under $5 because they are "too risky." I believe Sirius XM will continue to grow for various reasons and ignoring catalyst will only hurt investors.

I look at Sirius XM as sort of a cell phone company. Think about it this way; the company buys towers and sells its service. Other than buying new towers and providing upgrades, the service is virtually the same. Isn't the cell-phone industry "saturated" and on top of that flocked with competition on each corner? Despite competition and market saturation, the cell phone companies do extremely well. This is what I expect from Sirius, exponential growth and product innovation to boost revenue. Also, many subscribers have multiple accounts given their multiple vehicles.

The company is now profitable and I believe will continue to be and as a result pay down debt or return capital to shareholders. I have been long SIRI and stand by my position. This stock may make some surprising pullbacks to $2, but that will not last long. If it does, I will pick up more shares at my buy-in price for a long position. One thing to note is when I say long, I mean five years or more, not three to six months.

Disclosure: I am long SIRI, F, GM, GOOG. 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.