It's Not Too Late to Buy Into Sirius XM

How well did Sirius XM Radio (Nasdaq: SIRI  ) CEO Mel Karmazin fare at yesterday's Bank of America Media, Communications & Entertainment Conference? The stock popped 5% higher yesterday.

Next question.

Sure, Karmazin didn't lay to rest concerns about where Howard Stern would be when his five-year deal runs out. Then again, it was probably better that way.

Selling Sirius XM's potential -- with or without Stern -- is what will ultimately drive the stock. Let's go over a few of the meaty points brought up during yesterday's presentation.

Sirius XM is a big subscriber service
Closing in on 20 million accounts, Sirius XM is the country's second largest media subscription service. Only Comcast (Nasdaq: CMCSA  ) draws a bigger crowd.

There are economies of scale to be realized, and Sirius XM is going to get there. The triple threat of widening penetration in the auto market, higher conversion rates after new car buyers consume their free satrad trials, and diminishing churn rates can't be ignored.

Even if auto sales begin to slump -- and Ford's (NYSE: F  ) 10.6% year-over-year slip last month was actually kind pitted against meatier slides at GM and Honda (NYSE: HMC  ) -- fundamental improvements elsewhere will keep the subscriber count climbing.

Turning lemons into lemonade
Sirius and XM have lost a lot of money over the years -- and that isn't necessarily a bad thing. EchoStar's (Nasdaq: SATS  ) Charles Ergen and Liberty Capital's (Nasdaq: LCAPA  ) John Malone may have approached Sirius XM in its hour of need last year given their common interests in satellite-based subscription services, but the beefy accumulated deficit didn't hurt.

Sirius XM has $8 billion in tax-loss carryforwards. In other words, the company isn't going to be dishing out corporate taxes, for the most part, for a long time. It can use earlier losses to offset taxable gains in the future, and that actually means something now that Sirius XM has rattled off four consecutive breakeven quarters.

There is real value here, since we're talking about roughly $3 billion in tax obligations that can be ideally skirted given current rates. Naturally the value grows if tax rates inch higher.

Get pumped over Sirius XM 2.0
There aren't a lot of details about the serious platform upgrade that will kick in on new satellite receivers that will hit the market before next year's holiday season. All that the market has been told is that subscribers will be able to access more content and take advantage of broader functionality.

Obviously this could be a real game changer, especially if it can widen its programming without having to compress the audio quality of its existing content. If the functionality features apply outside of the automobile, it may also drive the perceived value of the medium.

One of the givens is that the new receivers will be more interactive, making it easier for listeners to do things like show interest in a sponsored spot or do more than just tag songs that can be later downloaded through Apple's (Nasdaq: AAPL  ) iTunes. In short, the Sirius XM 2.0 will make the platform more attractive to advertisers, as it opens up new revenue streams.

Stability in satrad
It took some masterful juggling and a brutally dilutive loan from Liberty Capital, but Sirius XM finally has the time it needs. There are no significant debt maturities until 2013, and the near-term financials are encouraging.

Sirius XM didn't raise its guidance during its presentation yesterday, but simply sticking to last month's outlook is fine. The media giant expects to close out the year with $2.8 billion in revenue, generating $575 million in adjusted EBITDA.

Despite the volatile past and last year's near collapse, Sirius XM is the real deal these days.

Do you think Sirius XM will close lower or higher between now and the end of the year? Share your thoughts in the comment box below.

Apple and Ford Motor are Motley Fool Stock Advisor choices. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Longtime Fool contributor Rick Munarriz is a subscriber to both Sirius and XM. He does not own shares in any of the stocks in this article. He 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 (6) | Recommend This Article (21)

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  • Report this Comment On September 16, 2010, at 11:13 AM, sidorg222 wrote:

    Interesting article. I hear a lot of naysayers about SiriusXM, and a lot of what they said was justified a year or more ago. However, Rick nicely summarizes the positives. You don't know what will happen in the future, but I think SIRI will do just fine.

  • Report this Comment On September 16, 2010, at 11:32 AM, Siriusbrit wrote:

    Finally an article that was a long time coming!

    Sirius & Mel have made great efforts to bring the Company to where it is today. A financially stronger, leaner, efficient and profitable company.

    Despite the past 12-18 Months of dismal growth in the Automotive arena, Sirius was able to not only survive but also merge, expand and prosper. This should be a good indication of how Sirius will perform in even a slightly improved economy!

    Do not bet against Mel Karmazin, he is old school and relentless, he will succeed and so will Sirius. The current stock price is a bargain simply because many investors have overlooked this 'turn around' story. Look for the pps to grow beyond $1.50 by Xmas.

  • Report this Comment On September 16, 2010, at 1:26 PM, cybdiver wrote:

    Looks like Sirius is positioning itself to go global. If you look at the line up of international flavors it would appear they are ready to go global.

    But heck it's a darn good stock. Just a short while ago it was about 9 cents a share today it poped to 1.11 for a high.

    Howeird Stern is a non-issue and does not command the listeners he used to. He made absolutly no difference in number of subscribers beyound his initial sign up. His career is exactly where it belongs in the toilet. He was funny, now he is redundant. Shock jocks are not shocking anymore. Sirius stock is now Serious money.

    Get ready for Global Radio.

  • Report this Comment On September 16, 2010, at 2:32 PM, doubting wrote:

    Rick,

    You have been consistently objective about siri relying on facts rather than on hearsay like many others do. I completely agree with you that today is still a great entry point. You have to come up with really a disastrous scenario for our economy to derail siri's momentum. However, the chances of such scenario are negligible. To me, this means that siri is just beginning to show its strength and huge potential. They just started tapping into new markets other than auto. As to auto market, again, one has to have really convoluted imagination to forecast another us auto slump of the previous magnitude. No one is saying that us auto recovery will be at a speed of light but it is already happening and will continue picking up pace... to great benefit of siri. Even cautious ford just stated that their September, 2010 sales are surprisingly strong. Let us wait another month or so for siri's Q3 results. If in Q3 sirius adds comparable numbers of subs to Q2, this will shut up any skeptics. Then siri stock will truly take off. I expect them to be between $1.50 and $2.00 by the end of the year.

  • Report this Comment On September 17, 2010, at 3:54 AM, Narcoticsrus wrote:

    This article was truly refreshing! I have heard so much BS in past articles but Rick here did a nice job highlighting the positives. Way to go Rick! As for all the losers, doubters, and disbelievers out there, your day of reckoning is coming. I say Sirius can do fine without Howard Stern, as he is pretty much washed up. I am sure Mel will be able to find a very highly suitable replacement for Stern, and save the company money to boot. To all of the Sirius supporters out there, I'm WITH ya! If I had $50,000, I would not even diversify. I would plunk it all down on Sirius right now, and wait. Mark my words, the little dog is gonna bark, and reality is gonna hit all the naysayers like a hammer. Long Siri . I say at LEAST $2 by years end!

  • Report this Comment On September 17, 2010, at 1:13 PM, 3screens wrote:

    @doubting and @narcoticsrus, you guys think this is a 7.78B company? Not sure about that.

    Long SIRI but not holding my breath for $2/share this year.

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