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The house rules are simple in this weekly column.

I bash a stock that I think is heading lower. I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Sirius XM Radio (Nasdaq: SIRI  ) .

Sirius disappointment
Shares of Sirius XM climbed 7% yesterday after CEO Mel Karmazin reiterated his outlook for the balance of the year and issued preliminary guidance for 2012. More importantly, he confirmed that basic rates will in fact inch higher come January.

Basic rates that were locked in at $12.95 a month for years will climb 12% to $14.49 next year.

Obviously, the market liked the sum of what the satellite radio giant had to announce, but I'm not all that impressed.

For starters, I figured that Sirius XM could have pushed through a $2 to $3 increase. Despite the plethora of streaming alternatives and improving dashboard integration, Sirius XM is still the only game in town when it comes to premium satellite content. Going up by just $1.54 a month is less than the music royalty fee that it initially rolled out a couple of years ago (before scaling it back from $1.98 to $1.40).

The price increase also doesn't jibe with Sirius XM's top-line guidance. How can a company target a 12% increase, but only boost its revenue guidance by 10% to $3.3 billion.

I get it. Many subscribers will prepay for gobs of time ahead of the hike at the 2011 rate. There are also lifetime subscribers out there who don't pay. There are also some accounts that pay far less than the going rates for promotion and retention purposes.

However, we can't make the mistake of simply comparing a 12% hike to a 10% year-over-year increase in revenue.

The starting line -- after all -- is the end of December. If we go with the annual run rate implied by the $784.4 million in revenue that analysts are targeting for this year's fourth quarter, guidance is really calling for a mere 5% top-line increase.

Yikes! That implies no net subscriber growth even if just half of the subscribers begin paying the new rate.

The upside here is that Karmazin has been historically conservative in his guidance. Sirius XM will grow its subscriber base, though probably by less than the 1.6 million net additions it is projecting for 2011. It will generate more than $3.3 billion in revenue, and the adjusted EBITDA and free cash flow growth of 20% and 75%, respectively, that it's targeting for 2012 is impressive enough.

I remain a long-term Sirius XM bull, but this mixed guidance -- and the market's enthusiastic embrace of the positives -- has me concerned about the stock's direction in the near term.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

  • Liberty Capital (Nasdaq: LCAPA  ) : True to my word, I bought into John Malone's company last month. Liberty Capital trades at a discount to its eclectic portfolio, and that includes its largest holding: a 40% preferred share stake in Sirius XM. Since I remain long-term bullish on Sirius XM, I'll keep holding Liberty Capital. In the meantime, the investment provides a discounted play on Sirius XM and with some downside protection given the rest of Liberty Capital's holdings, which include the likely playoff-bound Atlanta Braves and high-tech location specialist TruePosition. I'm not wowed by its recent 17% stake in Barnes & Noble (NYSE: BKS  ) , but I like the overall of its many parts. 
  • Google (Nasdaq: GOOG  ) : Apple (Nasdaq: AAPL  ) is usually an easy portfolio replacement, but I can't bring it up in good conscience after making it the subject of this weekly column earlier this month. Besides, Apple may be the king of digital music, but it just doesn't get the social end judging by Ping's lack of traction. I also considered Pandora (NYSE: P  ) for this slot. However, it's still a couple of years away from consistent profitability even if I like the value proposition of picking it up these days for far less than this year's IPO price. I'll stick with Big G, since its recent social success with Google bodes well for the upcoming launch of Google Music. It's also hard to argue against Google at less than 13 times next year's projected earnings.
  • CC Media Holdings (OTC: CCMO): I may catch some heat for singling out the parent of Clear Channel, but reports of terrestrial radio's death have been exaggerated. CC Media grew its revenue by 8% in its latest quarter. Don't laugh. Sirius XM's top line inched just 6% higher during the same three months. The growth driver at CC Media isn't really radio, which grew at just a 4% clip -- or flat if it hadn't acquired Westwood One's traffic business. It is growth in its outdoor advertising business -- especially in China and Sweden -- that drove results higher. CC Media is losing money, but deficits continue to narrow. There's something to be said about a media mogul generating twice the revenue of Sirius XM but trading at a small fraction of Sirius XM's enterprise value.

I still dig you, Sirius XM, but call me when growth returns.

The Motley Fool owns shares of Google and Apple. Motley Fool newsletter services have recommended buying shares of Apple and Google. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Liberty Capital. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Read/Post Comments (6) | Recommend This Article (1)

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 15, 2011, at 10:30 AM, siriuslyrick wrote:

    I find it amazing that people are disappointed with Mel for keeping costs down for consumers, especially given the current economic times. If anything, this modest increase will generate even more customer loyalty and have a very positive effect on the bottom line.

    Sorry, Rick, but I disagree. Although it would be hyperbole to call it "gouging," large price increases at this time seem completely inappropriate, no matter what increase investors may wish to see.

    Good on ya', Mel!

  • Report this Comment On September 15, 2011, at 10:33 AM, bottomfisherman wrote:

    Pandora is garbage Rick plain and simple. Large costs they cannot control, easy for competition to start up or restart up, some of which have the content Pandora lacks and never will have, Iheart for example. Their 100 million plus subscribes is all smoke and mirrors go there one time and never go back and one gets counted in that number. Reality is more like 32 million active users and they are there because it is free, so no future in many of them putting up a any money to subscribe for a third rate online music service. Could go on and on.l SIRI has content, a strong customer paying customer base, contracts with major sports leagues, is expanding its presence in automobiles new and used.... one can go on and on about the great future prospects of this company. I see though by not properly putting Pandora as the subject of this column you have been drinking way to much of their toxic kool-aid.

  • Report this Comment On September 15, 2011, at 12:45 PM, toomany4gong wrote:

    SIRI/XM = Luxury Premium Audio entertainment for those who can afford it.

    There are people who ride the bus and there are people who drive the Porsche.

    Don't compare apples and oranges.

  • Report this Comment On September 16, 2011, at 9:17 PM, Blueman1000 wrote:

    Pandora!!! What are you smoking?

  • Report this Comment On September 16, 2011, at 9:20 PM, Blueman1000 wrote:

    By the way Mel did you give Netflix advice about raising their rates? LOL. Siri will be fine with this type of long term management style and not this rape of the consumer banks and Netflix are trying to pull.

  • Report this Comment On January 22, 2012, at 6:47 PM, moseswillis wrote:


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