Sirius XM Is Not a $1 Stock

I recently had the opportunity to appear on the Road Dog radio channel on Sirius XM (Nasdaq: SIRI  ) , talking stocks with truckers. It didn't take long for us to hit a pothole.

While discussing potential profits in transport stocks -- UPS (NYSE: UPS  ) , FedEx (NYSE: FDX  ) , YRC Worldwide (Nasdaq: YRCWD  ) , and the like -- we got to talking about Navistar (NYSE: NAV  ) , a big-league truck builder whose rigs can be found in the fleets of many a trucker. Asked how much the stock cost, I took a look at its market capitalization and enterprise value and examined the GAAP earnings and the company's free cash flow. But the single number that really struck a chord was none of the above. It was the stock price.

Navistar, you see, sold for a hair less than $48 at the time of this interview. In contrast Sirius XM itself was selling for just a little more than $1. And the question arose: "Which would you rather own, a stock selling for $48 or one selling for $1?"

Which one, indeed.

Problem is, that's not the right question to ask. The price a stock sells for offers you almost no clue whatsoever of how much the company it represents is worth. The examples of Navistar and Sirius offer an especially good illustration, because Sirius, although selling for "only a dollar" a share, has 3.89 billion shares outstanding. In contrast, Navistar has only 71.7 million shares to its name.

Result: At $48 per share, times 71.7 million shares, Navistar is actually a cheaper company to own than Sirius. Its market capitalization of $3.5 billion is less than 70% the size of Sirius's $5.2 billion market cap.

Penny-stock dreams
If I had a nickel for every time someone told me that when a $1 stock "only goes to $10," you'll retire a millionaire … well, I'd have a lot of nickels. Sure, technically, the math is right. But the cold, hard truth is that it's as hard for a $1 stock to "go to $10" as it is for Navistar to move from $48 a share to $480.

To illustrate how this works, let's take a totally fictional company that sells Christmas wreaths over the Internet year-round: Piedmont International Evergreens (Ticker: PIE) has a $1 million market cap. With 10,000 shares outstanding, the market value of each share of PIE is $100.

At some point, Piedmont management decides it's not getting enough attention from investors and that the solution might be to lower the stock price. So PIE announces a 10-for-1 share split. Each existing share of PIE is going to be cut into 10 smaller slices, each priced at $1. If you owned a slice of PIE before the split, you owned a 0.0001% stake in the company. After the split, you will own 10 slices of PIE, but each one is worth only $1, so your ownership stake remains just 0.0001%.

See how this works? The stock price changed. The value of the company did not.

But here's the real question: Just because slices of PIE are selling for $1 apiece, does the chance that they will rise to $10 increase? I think not. It's still the same company. The economics of selling Christmas wreaths in the summer has not changed. Shoppers are no more likely to be thinking "evergreen" in July now than they ever were before. The only thing that's changed -- literally, the only thing -- is the price tag on these smaller pieces of PIE. For the new shares to "go to $10," PIE as a whole still needs to rise to a $10 million market cap, and that's no more likely today than it ever was.

Returning to Sirius
Now, on the other hand, it's also no less likely. After all, maybe I'm wrong about PIE. Maybe pine-fresh scents are popular this year, and the wreath market is ready to boom. After all, for years I was one of the staunchest critics of Sirius XM. I blasted the company for its lack of free cash flow. I pointed and gasped at management's gamble when it declined to purchase insurance against a catastrophic failure of its satellites.

Yet the more I look at Sirius today, the more I like it. Revenue growth is on a tear. The company recently joined the positive-free-cash-flow club. Analysts believe that the company's subscription-based revenue stream will help it to far outpace the growth rate of more mature media players such as Comcast (Nasdaq: CMCSA  ) . In fact, they expect Sirius, growing off a small subscriber base, to edge out even fast-expanding Netflix (Nasdaq: NFLX  ) in the race to increase earnings over the next five years.

Granted, the stock sells for 35 times free cash flow even today, and it carries a hefty slug of debt that plumps its enterprise value even farther. But given the transition to free cash flow, the breakneck growth pace, and -- as fellow Fool Tim Beyers pointed out earlier this week -- the potential for further stock gains as institutional investors pile onboard, I actually do believe that Sirius offers investors a chance for big profits today.

But not because of the $1 stock price. In spite of it.

Fool contributor Rich Smith owns no shares of any company named above. FedEx and Netflix are Motley Fool Stock Advisor picks. UPS is a Motley Fool Income Investor selection. The Fool owns shares of FedEx and UPS.

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. The Motley Fool has a disclosure policy.


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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 October 30, 2010, at 12:30 PM, ibEddy wrote:

    The fools, the experts, will tell you that a split will make no difference because your total value does not change. That is, if you have 2 shares of a stock that costs $50 you have $100 and if that stock reverse splits 1 for 2 you’ll end up with 1 share that is worth $100. Thus the experts tell you that $100 = $100 - no truer words have been spoken.

    Google splits and you’ll find that the biggest and brightest experts will tell you that a dollar is a dollar.

    Yet fools they are, who tell you that it makes no difference since a dollar is a dollar. If it makes no difference then why do companies split? They split because it changes everything. So how can $100 not equal $100? Well, the fact is that companies who are holding on for the big payout will turn that $100 into $125 after the r/s and then into $50 some days or weeks later.

    So $100 = $50, yes fools it is called your loss /your poverty!

    Ed

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  • Report this Comment On October 30, 2010, at 12:54 PM, southernbeachguy wrote:

    Good for you Rick, as you did, a lot of your fellow writers have been trashing Sirus for a long time, but unlike them you now see all of the positives of Sirus this pass year and have adjusted your view based on performance. That is what should happen. One thing that is not mentioned enough is why Sirus got into financial Problems. It was mostly because the merge with XM and the pitiful way that the FCC dragged their feet in providing their approval. Based on their actions the FCC really didn't want to allow it and the delay cost Billions of dollars. Cost of borrowing money then was higher and it put Sirus in a bind. What has not been said was the Sirus Business Plan was sound. If they could get over the time hump to pay their first big note they would prosper. DirecTV saw the potential in Sirus, loaned them money and now Sirus is a Cash Cow. They will be a Media Giant in 5 years, not a $5 billion company, but a potential $50-$75 Billion company. The first thing that I learned working on my MBA was the most important thing was to survive the first two years. Sirus/XM has survived that 2 years and now are on their way to the TOP.

  • Report this Comment On October 30, 2010, at 1:26 PM, kemo62 wrote:

    Error in your article

    :A $100.00 stock forward split (10 new for one old) gives you 10 shares worth $10.00 each. You said they would be worth $1.each. This error brings into question the accuracy of your mathematical conclusion, but I do understand the

    process of evaluation.

    Pasted here in relevent part

    To illustrate how this works, let's take a totally fictional company that sells Christmas wreaths over the Internet year-round: Piedmont International Evergreens (Ticker: PIE) has a $1 million market cap. With 10,000 shares outstanding, the market value of each share of PIE is $100.

    At some point, Piedmont management decides it's not getting enough attention from investors and that the solution might be to lower the stock price. So PIE announces a 10-for-1 share split. Each existing share of PIE is going to be cut into 10 smaller slices, each priced at $1. If you owned a slice of PIE before the split, you owned a 0.0001% stake in the company. After the split, you will own 10 slices of PIE, but each one is worth only $1, so your ownership stake remains just 0.0001%

  • Report this Comment On October 30, 2010, at 1:36 PM, nazareth2 wrote:

    Tell me than why was Sirius trading at $9.00 a share when they had less subscrbers,no free cash flow and all those stocks outatanding. Also why when it was that high all you so call no it alls said it was only worth $4.00 a share then $3.00 and so on. Now that it is adding subsribers again and is free cash flow why not project a number based on what the potencial could be.Lets have some positive feedback. Nubers to shoot for.Lets hear what happens when they reach 30 million subscribers and they are worth 10 billion and advertising increases. What is the ptencial then? Where are the numbers on that no one talks about what this could turn into. The only person that stays true to his beliefs is Mel Karmazin.He speaks the truth..

  • Report this Comment On October 30, 2010, at 1:43 PM, nazareth2 wrote:

    Tell me than why was Sirius trading at $9.00 a share when they had less subscirbers,no free cash flow and all those stocks outstanding. Also why when it was that high all you so call no it alls said it was only worth $4.00 a share then $3.00 and so on. Now that it is adding subscribers again and is free cash flow why not project a number based on what the potencial could be.Lets have some positive feedback. Numbers to shoot for.Lets hear what happens when they reach 30 million subscribers and they are worth 10 billion and advertising increases. What is the potencial then? Where are the numbers on that no one talks about what this could turn into. The only person that stays true to his beliefs is Mel Karmazin.He speaks the truth..

  • Report this Comment On October 30, 2010, at 1:49 PM, aza400 wrote:

    Who listens to terrestrial radio? I am in my car 6 hours a day without Sirius I'd go crazy. I cant listen to regular radio it has to many restrictions, you reception if you go to far (you never have to worry about that with Sirius) commercials ect. I love listening to music without interruption and CNBC, CNN, MSNBC, If you are stuck in traffic like 75% of people then you have to have Sirius if you dont you are missing out. Its worth it. I like Cosmo Radio, Howard, Playboy Radio (Tiffany Granath) The array of choice is amazing. It drives (no pun intended) me crazy when I get in someones car and they dont have Sirius.

  • Report this Comment On October 30, 2010, at 3:05 PM, chappg wrote:

    Most exchanges have minimal listing requirements including a $1 minimum stock price. If Sirius XM were drop below this price for 30 days, they would find themselves in jeopardy of being delisted.

    Since Sirius does have ample market cap for a reverse stock split of 1:5 or 1:10, then it's a moot point in this example. But, for an average stock with a smaller market cap, it's usually a sign that the stock is destined for irrelanve. Usually, a $1 stock is a sign of a bigger problem and a warning to stay away.

  • Report this Comment On October 30, 2010, at 3:36 PM, kemo62 wrote:

    IMO no R/S for SIRIXM.which is currently listed and growing organically as the company manages the debt,aquires new subs ,increases margins ,maintains free cash flow.. Getting Siri stock to$150.00 with a R/s of 100/;1 would not make Siri a blue chip stock.

    It would get shorted down to single digits.

    Gotta let the PPs rise with improvements in the balance sheet.

    Withv a stock like Siri, Momentum can be a big factor and if momentum gets fueled by irrational exuberence!! LOOk out baby!!UP we go and fast.

  • Report this Comment On October 30, 2010, at 3:41 PM, doubting wrote:

    Rich,

    Posts that look at siri fundamentals in earnesty are quite rare. Although you are not delving into details, your general idea is that the company is now healthy as ever and has a great protential. Kudos to you!!! My analysis is far from being comprehensive and addresses the most critical points. Today, sirius xm has only two real issues remaining that many bashers and nay sayers love to jump at. These are 6.4B shares on a diluted basis and about $3B in debt. Sirius has addressed the latter by very smartly refinancing part of 2013 debt moving it to 2018 and lowering significantly the interest at the same time. Technically, siri debt is not longer an issue because the company should be able to pay off the 2011 debt of about $220M and about $770M debt due late 2013 without any strain. The shares issue is much more complicated because such large number of shares makes actual share price very low. Karmazin has hinted on several occasions that sirius xm can satisfy its shareholders through several options such as paying off debt, paying dividends or buying back shares. Kamazin and Co are certainly aware of the share count problem and will address it sooner or later. To address it sooner, they need to attain significant cash flow. Karmazin mentioned numerous times that he will never again allow a situation where sirius will be short on cash like it was when they could not refinance xm's debt and almost went under. This is why his priority number one, apart from developing strong business, is to make sure that debt is not longer a threat to the company under any circumstances. Within the next two years, they will put debt issue to rest "for good" by reducing it by about 50% and moving the remaining payments far out so that siri could comfortably pay them off. They will aslo have to address the caveots assciated with the debt that may be in the way of share buyback. And only then they will be able to address the share buyback task. I am almost confident that this is Karmazin's actual plan for the next two to four years. However, how fast he will be able to implement it is the function of how fast siri will grow and make money. According to Karmazin's projections through 2013, he plans to make about $1B of fcf in 2012 and $1.4B fcf in 2013. If we look at his projections for 2010, siri was targeting 22.1M customers (will not achieve), 3B in revenue that they may underrun by $100M, $0.6B in EBIDTA (they will most likely beat this number by $100M!!!) and $0.4M in fcf (they will most likely underrun by $100M-$150M). However, 2011 and 2012 will most likely be breakthrough years when they will continue saving on merger synergies, will achieve 2M+ customer growth per year and, most importantly, will increase their ARPU to at least $14 due to business optimization (e.g. due to used car market penetration and 2.0 radio) and modest price increase of $2.00 mid next year. If we add lower interest payments, $8B in NOLs and negligible capex starting 2012, we have every reason to believe that their cash growth will be extremely strong and even better than Karmazin is projecting. This model will allow them to close the loop on debt and shares buy back. I am not the smartest guy in town and every analyst who is seriously analyzing siri should be able to see that. This is why I keep saying that all the above plus virtually no competition on the radio market due to their monopoly in delivery infrastructure and phenomenal product make sirius xm TODAY, I emphasize TODAY, a $20B company with a potential to become an $60B to $80B company in the next four or five years. We cannot and should not discount the fact of siri's huge potential in its valuation. We never applied such waivers to amazon.com or google's potential when they were losing money in droves, in particular amazon that was losing money for years and still had its share price grow at a very healthy pace. We have always accounted for amazon's unique niche value. The same is happening with Facebook that is losing or making very little money at best but is still valued at tens of billions already today. Why do so many refuse to recognize siri's phenomenal potential while recognizing it in the above and other companies? Why should anyone make sirius xm an exception to this golden rule?

  • Report this Comment On October 30, 2010, at 9:54 PM, pete163 wrote:

    Ok boys and girls heres what I did, after all the good news that you all of you have been showering on to Sirius I pulled the trigger and loaded up. I even sold my friends cat for twenty bucks to buy some stock. So there you have it, the hole heap load. Now if this Sirius turns into Sirius pile of dune. Heres what i'm going to do! I'm going to sell my friend dog and hire a witch doctor and have him place a curse on all of you with meatloaf size boogers for the rest of your life. So this better fly this time! Good luck all.

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