Sirius XM Radio (Nasdaq: SIRI ) is the real deal.
The satellite radio giant is now profitable and waist-deep in what will be its sixth consecutive quarter of sequential subscriber growth.
Unfortunately, some investors can't get over Sirius XM's steep valuation. As a result of the massive 6.4 billion shares outstanding (now that Liberty Capital's (Nasdaq: LCAPA ) 40% preferred stake is showing up on the income statement), Sirius XM has a market cap closing in on $9 billion. Tack on its net debt, and Sirius XM's enterprise value is approaching $12 billion.
Value investors may cringe over paying 70 times next year's projected profitability on a market-cap basis, or four times next year's revenue on an enterprise value basis. But then, growth investors haven't needed the value hounds to propel shares of Sirius XM from last year's panicked low price per share of $0.05 to yesterday's close at $1.39.
However, what if there were a way to play Sirius XM's success without the hefty multiples and platform risk? Several companies are piggybacking on Sirius XM's growth from three distinct perspectives. They naturally won't offer the pure upside of owning shares of the satellite radio star outright, but we can make a compelling risk vs. reward case for approaching the popularity of satellite radio in understated ways.
Let's go over the three ways of piling on the Sirius XM bandwagon.
Investors
Gabelli & Co. analyst Brett Harriss turned heads earlier this month when he downgraded shares of Sirius XM on a valuation basis. He's still bullish on satellite radio, but the stock's price tag leaves him suggesting Liberty Capital as the better play at this point.
Liberty Capital's 40% stake in Sirius XM is valued at nearly $4 billion, yet all of Liberty Capital can be had for $5 billion. The key here is that Liberty Capital also owns the Atlanta Braves, GPS tracking specialist True Position, and small stakes in some very prolific companies. By Harriss' math, Liberty Capital is trading at a 40% discount to the value of its holdings. In other words, Liberty Capital's non-Sirius XM investments are worth roughly as much as its position in Sirius XM.
A small discount is understandable, but Liberty Capital is trading at too wide a markdown to ignore.
Content
Howard Stern and Oprah Winfrey don't trade publicly, but investors can cash in on Martha Stewart's media empire through Martha Stewart Living Omnimedia (NYSE: MSO ) .
When Stewart made the leap to Sirius XM, it was easy to be skeptical. Stewart's world of home crafts and cooking are visual mediums. How would they play out on radio? However, Stewart's ability to nab intriguing guests and provide content that just isn't readily available on terrestrial radio seem to be working.
Playboy (NYSE: PLA ) is another company whose visual-intensive product would seem to get lost in the aural translation. However, Playboy's ability to set up its more provocative and radio-friendly centerfolds in satellite radio's less restrictive format is working for Sirius on channel 99.
The third publicly traded content play is an unusual one, given the uncensored nature of satellite radio. Salem Communications (Nasdaq: SALM ) runs Family Talk, a Christian-themed talk format channel on XM that will be added to Sirius next week.
Yes, Salem's deep in terrestrial. It owns or operates 93 radio stations and provides programming content through an additional 2,000 radio stations. It also runs several faith-based websites including Christianity.com and Jesus.org, as well as conservative news site TownHall.com.
I'm leaving out the huge media conglomerates that provide programming for Sirius and XM, largely because success on Sirius XM won't necessarily move the needle for them.
Suppliers
Consumer electronics retailers may become major players in pushing satellite radio receivers again by the end of next year, when Sirius XM 2.0 systems begin to roll out. The new platform will offer broader content and features.
However, until Sirius XM 2.0 becomes a reality, satellite radio will be at mercy of new car sales for the bulk of its gross subscriber additions.
After last week's successful IPO by General Motors (NYSE: GM ) , investors looking to latch on to Sirius XM's original stateside automotive partners can now choose between GM and Ford (NYSE: F ) .
GM's re-emergence with a cleaner balance sheet is promising, though we've yet to see whether it can match the gains that Ford has provided investors since bottoming out last year.
There are plenty of flavors for those seeking to play Sirius XM's success through its investors, content providers, and the automotive giants cranking out new rides with factory-installed receivers.
Sirius XM bulls would argue, though, that rather than riding the coattails, there's nothing wrong with wearing the coat itself.
Are you considering a coattail play on Sirius XM? Share your thoughts in the comment box below.
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