5 Reasons Not to Worry About Sirius XM

Welcome home, bulls.

If you think this column is going to be an open lovefest over Sirius XM Radio (Nasdaq: SIRI  ) , you're absolutely right. The caveat is that I'm also writing today about the five reasons for investors to worry about the satellite-radio giant.

Let's get into the reasons to don the party hats.

1. Fatter billfolds
Sirius XM may be watching over fewer subscribers than it did at the beginning of the year, but most of the remaining listeners are paying more. Sirius XM began charging for online streaming in March. It also bumped the monthly rate for secondary receivers within the same family account by 29%. Over the summer, Sirius XM instituted a music royalty fee that added nearly $2 to the monthly tab. That's some pretty impressive pricing flexibility for a company whose individual parts merged under the condition that it leaves its base rates alone until 2011.

The end result is that analysts see revenue growing by 9% next year, even if subscriber tallies flatten out or continue to inch lower.

The vetting process also has its benefits, as advertisers are likely to pay more for a loyal audience that didn't flinch at the effective rate increases.

2. Just go with the cash flow
Sirius XM disavowed most of its revenue and subscriber-growth projections last year, but it's been sticking to its cash-flow guidance. In fact, most of the Sirius XM updates since then have been to actually raise its target.

Sirius XM now expects to generate adjusted operating income of $400 million this year, up from the $350 million it was targeting a quarter earlier.

Operating profits don't mean a whole lot if debt obligations are percolating, but there is good news on that front, too.

3. No more panhandling
Sirius XM was desperate earlier this year. It was swapping debt for equity at pocket-change prices. JPMorgan Chase (NYSE: JPM  ) and UBS AG (NYSE: UBS  ) were creditors with loans to Sirius XM coming due in a few months. After proclaiming that filing for bankruptcy wasn't an option, Sirius XM relented.

With a debt-repayment hurdle looming, a grim press release warned that "it may be forced to file for bankruptcy protection as early as February 17, 2009."

It didn't.

Liberty Media (Nasdaq: LCAPA  ) and EchoStar (Nasdaq: SATS  ) stepped up as rival saviors, with Liberty emerging victorious.

The terms were harsh -- with Liberty amassing a preferred-share stake equaling 40% of the company on top of a costly loan -- but beggars can't be choosers.

Sirius XM isn't begging anymore. It had no problem offering $257 million in notes last month at attractive rates, and without diluting the share count. Sirius XM's near-term survivability is no longer questioned, especially by the company itself.

4. The synergies are real
The combination of two industry titans typically results in material cost-cutting initiatives. This is becoming apparent with every operating profit upgrade out of the Sirius XM camp. Everything from station consolidation to combining operations translates into some serious nibbling at the overhead.

The synergies are even more pronounced when the end result is essentially a monopoly (fooled ya, FCC suckers). Since Sirius XM is simply competing against itself, subscriber acquisition costs continue to get cheaper. It no longer has to differentiate -- or denigrate -- its satellite-radio rival to get its marketing message across. It doesn't have to compete for automaker attention. Just watch Sirius XM's negotiating prowess as its star contracts come up for renewal or as terrestrial celebrities explore the migratory process.

5. Turning to the Web
Another satellite was placed into Sirius XM service this week. The satellite was launched in June and has completed all post-launch testing.

As you can imagine, these puppies aren't cheap. Satellite coverage gives Sirius XM a huge coast-to-coast advantage, but it's also something that may become less necessary as online connectivity becomes more pervasive.

The trend opens Sirius XM up to Web radio competition from the likes of Pandora, CBS's (NYSE: CBS  ) Last.fm, and Yahoo!'s (Nasdaq: YHOO  ) Y! Music, but none of those companies has the premium infrastructure in place with 18.4 million paying subscribers. It's the one with the branded content and the radio celebrity contracts.

In short, it's in the driver's seat when it comes to Internet radio. Sirius XM may not be able to get away with charging as much as it does now for the service in the future, but the global opportunity and the lighter lifting -- free of satellites, signal repeaters, and perhaps even proprietary receivers -- will result in a higher-margin giant than the market sees today.

Connectivity also affords Sirius XM some legitimate opportunities in e-commerce and social networking, areas where it's just starting to scratch the surface.

Do you still think Sirius XM is doomed? Before you answer, check out the five reasons to worry about Sirius XM.

Longtime Fool contributor Rick Munarriz is a subscriber to both Sirius and XM. He owns no own shares in any of the companies in this story and is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 10, 2009, at 5:13 PM, voicedupdotcom wrote:

    Nice recap!

  • Report this Comment On September 10, 2009, at 5:23 PM, geoslv wrote:

    "The synergies are even more pronounced when the end result is essentially a monopoly (fooled ya, FCC suckers)."

    Best line in the article.

    Do you think they need $2 per subscriber to pay for royalties? Maybe 65 cents. And that's maybe a 5 cent increase from last year.

  • Report this Comment On September 10, 2009, at 10:08 PM, timd209 wrote:

    First good 2 relevant articles about SIRI that MF has posted in a long time. I hope they are not the last.

  • Report this Comment On September 11, 2009, at 3:55 AM, ryanalexanderson wrote:

    MOTLEY FOOL SUCKS IM CANCELLING MY SUBSCRIPTION THE AUTHOR DOESNT KNOW WHAT HES TALKING ABOUT I WOULD PROVIDE DETAILS BUT IM TOO BUSY!!!!

    <cough> <cough>

    Ah, that's better - I -thought- something was missing. Can't have a SIRI article without a good random heckle! Hard on the throat, though - I don't know how some of these guys can do it professionally.

  • Report this Comment On September 11, 2009, at 6:30 AM, SIRIDoom wrote:

    SIRI NASDQ ALERT

    Close of trading today 9-11-09 SIRI is officially noncompliant of the NasDq $1.00 rule. The clock for SIRI delisting from the NasDq will be ticking down to disaster.

    SIRI Mel’s answer to the NasDq will include the alarming words “REVERSE SPLIT”. The words “REVERSE SPLIT” are going to ring alarms of disaster to all who currently hold SIRI stock.

    SIRI Mel now has a duty to inform stock holders of the NasDq letter and the SIRI response with intention to reverse split. The market will be informed regardless of how much money Mel has panned out to suppress this news.

    The Fedex truck will be on the road with the NasDq noncompliance letter by 5pm today.

    Mel’s planed penny stock scam of December 18, 2008 has come full circle.

    Mel explained to stock holders his plan to issue stock to pay debt then, reverse split the stock to recover saturation and be compliant of the NasDq. Mel’s plan has always been “a penny stock scam designed to rip off stock holders”.

  • Report this Comment On September 11, 2009, at 8:45 AM, khenry7650 wrote:

    I BELIEVE YOU MAKE VALID POINTS ON BOTH SIDES. MY REASONING FOR BUYING THE STOCK WAS SIMPLY SURVEY THE MANY PEOPLE > 100 I FOUND THAT 0VER 90 PEOPLE HAVE OR ARE GETTING IT WITH NEXT VEHICLE OR IN THEIR HOME. SIMPLE, BUT IT WORKS FOR ME, AND ANY STOCK YOU RUN THE RISK AND MUST ACCEPT IT.

  • Report this Comment On September 11, 2009, at 9:00 AM, rjoh107 wrote:

    How To Quickly Remove Motley Fool articles from your Yahoo Headlines 10-Sep-09 08:52 pm

    1. Click the "Filter Headlines" link at the top of the Headline article section of the Yahoo SIRI main quote info page.

    2. Uncheck motley Fool from the main and external headline sections (2 checks)

    3. Click "Finish" at the upper/right of the screen.

    Hasta la vista MFers!! :)

  • Report this Comment On September 11, 2009, at 10:44 AM, JPS007 wrote:

    Another biased and useless article from MF. Seriously!

    Every point in this article has a negative spin to it. For example:

    Point 1. "The end result is that analysts see revenue growing by 9% next year, even if subscriber tallies flatten out or continue to inch lower." This statement has a negative flavor to it. If these are reasons not to worry, why does be mention lower subscriber numbers, when many analyst expect sub numbers to increase.

    Point 2. "Operating profits don't mean a whole lot if debt obligations are percolating, but there is good news on that front, too" Another suggestion that dept is still looming out there. True, but the idea of this article is suposed to be positive, with the other article as a counter balance.

    Point 4. "The terms were harsh -- with Liberty amassing a preferred-share stake equaling 40% of the company on top of a costly loan -- but beggars can't be choosers.". Again, he cant just praise Sirius without a bash in the middle.

    Point 5. "As you can imagine, these puppies aren't cheap. Satellite coverage gives Sirius XM a huge coast-to-coast advantage, but it's also something that may become less necessary as online connectivity becomes more pervasive." Again...how is this a positve article, or a point not to worry about. He suggests that Sirius wasted money on a satellite because things are moving to the Internet.

    With all that said, some point are valid. MY point is that the article is totally biased with a negative anti SIRI slant. This article is suposed to be 5 reasons NOT to worry about SIRI, however its riddled with inuendo about reasons to worry. Then he follows up with reasons TO worry. In other words, after reading the two MF articles, an objective person would judge them both to be negative.

    One more point (or contradition in this article)....

    In one sentence, he says they have a monopoly, in the next point he said there is competition with Last FM and Pandora. Also to be a monopoly, doesn't the company have to have a majority of market share? Hmmm, last I checked Sirius has less than 5% of the market.

  • Report this Comment On September 11, 2009, at 11:26 AM, cantbefoolish wrote:

    Well said JPS007. I totally agree.

  • Report this Comment On September 11, 2009, at 4:44 PM, dedmunds wrote:

    SIRIDoom stop crying about the money you lost with SIRI. We all know why you do this. Grow up and get real over it!!!!

  • Report this Comment On September 14, 2009, at 6:26 PM, Geebie wrote:

    Two, no three! Three reasons to consider SIRI.

    1) Quietly--so quietly you may not have noticed--SIRI stock as crept up and doubled in price since mid-June. Someone is buying it. It's almost like they don't want you to know.

    2) My wife rented a car recently with Sirius XM. Quoth she, "I loved it!" No analyst could utter as strong an endorsement as that.

    3) Sirius XM generates advertising revenue and quite a bit of it. I don't see that figured into these discussions very much, but it has to have some impact on the top line.

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