Sirius XM: A Short-Term Play At $3

| About: Sirius XM (SIRI)
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In the coming years, analysts forecast that web radio and mobile radio applications could erode the value of satellite broadcasting as a distribution medium. Web radio service like Pandora (NYSE:P), Foneshow, Stitcher, Slacker, and traditional content providers are broadcasting cheap or free portable and mobile content. For Dial Global (DIAL), Sirius XM (NASDAQ:SIRI), and Liberty Media (LMCA), such streaming could also spell trouble.

Despite this, I do believe that stocks in satellite broadcasting could present a short-term buying opportunity for investors after a decent earnings report.

Sirius XM reported third quarter results recently that showed revenues rose 13.7% to $867.4 million from the earlier year quarter, beating Wall Street's estimate of $803 million. The company produced more free cash flow in the first nine months of the year than in any full year in its history. It delivered a record level of subscriber addition of 446,000, record revenue, and double-digit growth. Its net income fell to $74.5 million (one cent per share) from $104.2 million (2 cents per share) a year earlier, a decline of 28.5% from the year-earlier quarter. Average revenue per subscriber rose to $12.14, up from $11.97 in the prior quarter, while the three-quarter net profit included a loss on repayment of debt of $10 million.

Looking forward, Sirius wants to invest in new businesses such as the telematics service that it announced in the last quarter with Nissan (OTCPK:NSANY). The company intends to monetize its content through mobile phones to complement its traditional outlet. To do this, it has released its iPhone applications in the second quarter, free to subscribers who pay for Sirius' $13 monthly online streaming package and $3 extra per month to those who subscribe to the other Sirius' plans. It also hopes to use its free cash to reduce its debt to the lowest level since the merger of Sirius and XM Radio.

The merging of Sirius and XM Radio has allowed the new entity to become dominant in the satellite broadcasting business, improve its fundamentals, and attract a new momentum in its operation. Liberty Media gave Sirius a $530 million loan to avoid bankruptcy in 2009, capitalizing on the stake it received in return. The acquisition, shortly to be completed, has opened the doors for Sirius to focus on the future with some stability. The two satellite companies could cross-market to each others' subscribers. Liberty could help Sirius work on its business plan with the aim to cut costs, such as Sirius' talent fees. It could spin off the radio into an independent company rather merge the companies into one entity. It could also bundle the radio service with DirecTV (DTV), in which Liberty holds an ownership interest.

However, Sirius faces two tough challenges. First, it is a matter of time before satellite radio broadcast becomes obsolete due to the rapid changes in broadcasting technology. As web radio and mobile radio applications flourish, they are beginning to erode the value of Sirius' pricey content deals. This accounts for customers that have been canceling their subscription and going online to listen to the kind of music they like cheaply or free-of-charge. Some of Sirius' music and sports channels have been replicated online

For example, MLB, baseball league's internet unit, releases an iPhone mobile application that streams 30 baseball games live - which is what Sirius' customers get - and offers video clips and live score updates for $10 for the entire baseball season. Sirius' subscription starts at $10 a month. Radio customization site, Slacker, has reconstructed more than 17 Sirius' channels. Many of Slacker's monthly listeners come from mobiles, and the service is free for those willing to listen to thirty seconds to two minutes of advertising per hour. For $3.99 a month, Slacker allows song skipping and has no adverts. Foneshow allows any phone with text messaging capabilities to receive a short text message with a link to a new show segment that becomes available. Customers' phones start streaming when they hit "Send". Unlike Sirius, Foneshow sells advertising. Pandora allows customers to use its service if they have a WiFi, so they are able to access plenty of stored, synced-up music on an iPod.

Second, satellite subscriptions are part of discretionary spending that is usually negatively affected by a weak economy. For instance, auto sales, which have fueled Sirius' subscriber growth for several years, are slowing down. The same thing is happening to retail store sales. Also many customer are slamming their wallets shut amid current economic challenges.

According to Susan Kevorkian, a program director and researcher at Interactive Data (IDC), Sirius must offer pure content through new distribution channels such as mobile and change from being a mere satellite radio company. There are definitely more suggestions about how Sirius can change its business model so it can withstand its present challenges.

I am confident of Sirius' ability to increase revenue in the next few quarters because it has done so consistently in the last four. The company has increased its subscribers to 1.8 million net additions, and its executives believe growth will continue in the fourth quarter. Profit margins have jumped from 9.2% a year to 24.03%, according to the last earnings report, while total debt to equity dropped from 492 to 71.73. To make it better, Sirius has a price-to-earnings ratio of 5.33. Its price-to-sales is not so attractive at 3.37, compared to 0.43 for Cumulus, 0.65 for Dial, and 1.87 for industry average. However, I do believe it is only a matter of time before satellite radio broadcast becomes obsolete. Given this fact, Sirius is a short-term buy at $3 per share.

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