Buy This Stock Ahead Of The Auto Sector Rebound

| About: Sirius XM (SIRI)
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Sirius XM (NASDAQ:SIRI) continues its trend of solid growth with its recent quarterly earnings report.

The company's stock is now trading around $2.74 a share, after nearing its 52-week high of $2.97 before the election. Sirius has been one of the most remarkable turnaround stocks in recent years, after it was left for dead during the height of the Great Recession. It is now a solid stock that will see consistent growth going forward.

Sirius trades at a ratio of just over 5, which shows it is a real value. When you compare the company to other publicly traded radio companies you begin to see the real value in buying Sirius. Cumulus Media (NASDAQ:CMLS) trades at a ratio of almost 35. Media giant CBS (NYSE:CBS), which operates many radio stations, is trading around a 15 ratio. And the old Clear Channel, now CC Media Holdings (CCMO.OB) is not making a profit. This is real value, and this value is further strengthened when you recognize that Sirius is going to see earnings growth of 20% or more for the next few years, which will far outstrip its radio competitors. The growth prospects for Sirius look very good.

When you compare Sirius to another of its competitors you see that the stock is a downright steal. Internet radio service Pandora (NYSE:P), which went public last year, is not expected to generate profits this year. It is trading at more than 290 times earnings estimates for the fiscal year that ends January 2014. Furthermore, Sirius XM's business model makes a heck of a lot more sense than Pandora's.

While it is true that Sirius XM must spend a great deal of money for its content, shows hosted by celebrities such as Howard Stern, Martha Stewart, Oprah Winfrey, etc. -- along with fees to broadcast sporting events and league radio -- are exactly what allow people to justify paying a subscription for radio service. Sirius XM's 22 million subscribing customers are a testament to that model's success. With Pandora, there isn't really anything about the content that you can't get anywhere else, especially now that Swedish music service Spotify has made a big splash on U.S. shores. Pandora does have a subscription service that lets you avoid commercials, which could be a selling point compared to traditional free "terrestrial" radio. But Pandora still generates more than 85% of its total revenues from advertising.

Sirius XM can avoid the fickle nature of advertising revenue, something that really sets it apart from its competitors. The company generates less than 3% of its revenue from advertisements. Sirius XM also set a record high for subscribers earlier this year, even while raising subscription fees. Its model is working.

Sirius XM is also a roundabout way of investing in the continued resurgence of Detroit's Big 3 and the auto industry in general. The company has deals with Ford (NYSE:F), General Motors (NYSE:GM), Chrysler, Honda (NYSE:HMC), Toyota (NYSE:TM), Nissan, and Hyundai to have radios pre-installed in their vehicles. As auto sales increase, which they have been doing this year, this adds revenue to Sirius XM's coffers as well as to investors' pockets. It is a good industry to be tied to right now.

Sirius XM finished the first quarter of this year with more than 3.7 billion basic shares outstanding and 6.5 billion diluted shares. All these shares have made Sirius XM one of the most actively traded stocks in the market. One thing that would help investors going forward is if the company makes the decision to buy back some shares and halt the heavy dilution. The company has the cash on hand to do so.

The biggest cause for concern in the future concerns Sirius XM's relation with Liberty Media (LMCA). Liberty Media currently has a preferred stake in Sirius XM that, if converted, would amount to a 40% ownership stake of the common stock. Liberty bought the stock when there were serious concerns that Sirius XM was headed for bankruptcy. Liberty's investment saved the company.

At the present time, Liberty is petitioning the FCA for a majority stake in Sirius XM. Until this issue is resolved there will be no buyback program and investors might continue to suffer because of it. Nonetheless, Sirius XM shareholders will ultimately benefit. Once this issue is resolved, either way, there will be in all likelihood some sort of buyback program.

Sirius XM will also see increased revenues in the future coming from its music-discovery service. While this area is competitive with Pandora and Microsoft's (NASDAQ:MSFT) Xbox service leading the way, Sirius will have a big built-in advantage. That advantage is its 22 million current subscribers. It will be far cheaper for current subscribers to access Sirius XM's service then it will be to go out and purchase a brand new service. This will help add to the company's revenue stream.

What ultimately matters for Sirius XM, however, is consumer spending -- and auto sales in particular. As long as the U.S. avoids a nasty economic pullback, Sirius XM should continue to add subscribers, boost revenue, and remain profitable. Auto sales continuing on an uptick will ensure a ready pool of subscribers going forward. Its premium content makes it attractive to consumers in ways that regular terrestrial radio and Internet radio cannot do. The company's business model also ensures more robust and regular revenue; its ability to rely on revenue from subscriptions as opposed to advertising will prove to be a good bet for investors and strengthen the company's bottom line.

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.