Why Sirius XM May Be Hiding Weakness

Sirius XM Radio (Nasdaq: SIRI  ) carries $4.4 billion of goodwill and other intangibles on its balance sheet. Sometimes goodwill, especially when it's excessive, can foreshadow problems down the road. Could this be the case with Sirius XM?

Before we answer that, let's look at what could go wrong.

AOL blows up
In early 2002, AOL Time Warner was trading for $66.27 per share. It had $209 billion of assets on its balance sheet, and $128 billion of that was in the form of goodwill and other intangible assets. Goodwill is simply the difference between the price paid for a company during an acquisition and the net assets of the acquired company. The $128 billion of goodwill in this case was created when AOL and Time Warner merged in 2000.

The problem with inflating your net assets with goodwill is that it can -- being intangible, after all -- go away if the acquisition or merger doesn't create the amount of value that was expected. That's what happened in AOL Time Warner's case. It had to write off most of the goodwill over the next few months, and one year later that line item had shrunk to $37 billion. Investors punished the stock along the way, sending it down to $27.04 -- or nearly a 60% loss.

In his fine book It's Earnings That Count, Hewitt Heiserman explains the AOL situation and how two simple metrics can help minimize your risk of owning a company that may blow up like this. Let's see how Sirius XM holds up using his two metrics.

Intangible assets ratio
This ratio shows us the percentage of total assets made up by goodwill and other intangibles. Heiserman says he views anything over 20% as worrisome, "because management might be overpaying for the acquisition or acquisitions that gave rise to the goodwill."

Sirius XM has an intangible assets ratio of 61%. This is well above Heiserman's threshold, and you should keep a close eye on just how the company is fueling its growth. It's also useful to compare it to tangible book value.

Tangible book value
Tangible book value is simply what remains after subtracting goodwill and other intangibles from shareholders' equity (also known as book value). If this is not a positive value, Heiserman advises you to run away because such companies may "lack the balance sheet muscle to protect themselves in a recession or from better-financed competitors."

Sirius XM Radio's tangible book value is -$3.9 billion, so we have another yellow flag.

By the way, I asked Heiserman about the tendency for some large-cap blue chips -- names like Procter & Gamble, IBM, and Altria -- to have a high intangible assets ratio and negative tangible book value. He says this can be OK, provided the company has (1) modest or no net debt, (2) persistent and rising levels of free cash flow, and (3) stock buybacks at a discount to intrinsic value.

Foolish bottom line
To recap, here are Sirius XM Radio's numbers, as well as a bonus look at a few other companies in its industry.


Intangible Assets Ratio

Tangible Book Value (Millions)

Sirius XM Radio 61% ($3,943)
Pandora Media (NYSE: P  ) 0% $104
CBS (NYSE: CBS  ) 58% ($5,251)
Clear Channel Outdoor Holdings (NYSE: CCO  ) 37% ($92)

Data provided by Capital IQ, a division of Standard & Poor's.

If you own Sirius XM Radio, or any other company that fails one of these checks, make sure you understand the business model and management's objectives. You can never base an entire investment thesis on one or two metrics, but there is a yellow flag here. I'll help you keep a close eye on these ratios over the next few quarters by updating them soon after each earnings report.

Fool analyst Rex Moore owns shares of Procter & Gamble but of no other companies mentioned in this article. The Motley Fool owns shares of Altria Group and IBM. Motley Fool newsletter services have recommended buying shares of Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

Read/Post Comments (10) | Recommend This Article (2)

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 24, 2011, at 11:37 AM, 67vair wrote:

    Article is just a waste of time to read. Offers no proof why Sirius is hiding any weakness. Just conjecture. Foolish for sure.

  • Report this Comment On September 24, 2011, at 12:04 PM, Austin77478 wrote:

    The article is flat at best!

  • Report this Comment On September 24, 2011, at 1:29 PM, homer985 wrote:

    >>>If you own Sirius XM Radio, or any other company that fails one of these checks, make sure you understand the business model and management's objectives<<<

    Funny you should make the above comment -- because you apparently do not understand the Sirius business model or the makeup of their balance sheet.

    You're quick to point out that Sirius has $4.4 billion in Goodwill & Intangible assets. That's great... you've made a great point. But did you bother to check "why" it is that high? The Goodwill is exactly as you pointed out -- from the Sirius XM merger. However, $2.1 billion of the $2.8 billion intangible carrying value are the FCC broadcast licenses.

    Didn't check that before writing your poorly planned out article, did you?

    Go ahead and make the arguement that licenses need to be listed as intangible assets... I won't argue with you. That's the way it's always been and always will be. However, one must understand that without these broadcast licenses from the government -- there is no Sirius XM. It is just as important as any tangible asset of the company... if not more so. And it is HIGHLY valuable.

    Not only are these licenses highly valuable -- they're undervalued on the balance sheet. Didn't know that, did you? The XM licenses are valued at $2 billion; while the Sirius licenses are valued at $83 million. Why the discrepancy? Because those are the purchase prices... Sirius paid $83 million for theirs in 1997. The XM licenses were revalued to the current value at the time of the merger... based on the going rate for licenses at the time. Thus the carrying value of the licenses is just under $2.1 billion and carried as most of the amount under intangible assets.

    Today, the licenses for this 25MHz of spectrum is worth at least $5 billion... based on the current market place; and not likely to decline as the amount of available spectrum is not increasing, but shrinking. Meanwhile, these licenses are carried for obviously significantly less than what they are worth.

    Please do your homework next time before writing such a foolishly short-sighted article. At least try to understand the balance sheet a little better beforehand. Because when you factor in that this intangible amount are the licenses -- it drastically changes the outcome of your article... in fact, it makes it moot.


  • Report this Comment On September 24, 2011, at 3:07 PM, brandonmatthews wrote:

    When Sirius and XM merged, Sirius agreed to 4.6 shares of siri per share of xm. The share price fell a lot, but the value of XM had was already assumed. So when they merged a price difference between what was paid and what xm was worth occurred, resulting in Sirius recording a good amount of "goodwill"...

    What the fool fails to recognize is that the bulk of the goodwill is in the form of XM's bandwidth value at the time of the merger...

    Both sirius and XM paid a certain price for their respective bandwidths, and that was the "value" for many years reported by both companies. When the merger was completed, XM's bandwidth was assigned the new, then current market value at the time, which was much, much more given the laws of supply and demand.

    If you check the 10Q or k filings from when the companies reported post merger, you will see that sirius' spectrum remained and to my knowledge still remains highly undervalued given the shortages of spectrum, while XM's was reported to be much higher. Both spectrums would be worth considerably more in today's market...perhaps as much as 20 billion dollars each and that is still not factored into the valuation of the company. Ask Charles Ergen of DISH about spectrum value....

  • Report this Comment On September 25, 2011, at 8:07 PM, artstudio1 wrote:

    You're the FOOL if you read anything from the FOOL. But I am the biggest FOOL of all for wasting my time posting this. This article is completely wrong in all aspects . . . I will remain LONG on SIRI.

  • Report this Comment On September 25, 2011, at 9:58 PM, sirinsocal wrote:

    Rex, Why would you write an article based on the value of Sirius' Goodwill without researching the current market value of their broadcast licenses?

    Why haven't you responded to homer's comments?

  • Report this Comment On September 26, 2011, at 11:56 AM, wonteach wrote:

    I discovered a long time ago that reading comments on any article about Sirius was like reading comments on ESPN. Sirius fans, much like the fans of Notre Dame, the Boston Red Sox, or the Los Angeles Lakers, are impervious to facts and logic. Their investment decisions are driven completely by emotion - a practice which is likely to land them in the poorhouse.

  • Report this Comment On September 26, 2011, at 12:55 PM, homer985 wrote:

    >>>Their investment decisions are driven completely by emotion - a practice which is likely to land them in the poorhouse<<<

    Wonteach... teach me this... why don't you challenge the "facts" I presented and tell everyone why they're all wrong? Tell everyone why they should ignore the value of the broadcast licenses inflating the value of Intangible Assets.


    PS... Been invested in Sirius and XM off and on for over 10 years. Made a killing. Sitting on a small amount leftover (house money) that is averaged in well under $0.50/share. I'm going to land in the poorhouse?

    Yer funny... I await the challenge to my facts.

  • Report this Comment On September 26, 2011, at 2:47 PM, PokerRon wrote:

    Looks like FOOL threw a bum pitch and Homer hit it out of the park. I'd like to see a response to Homer's comment. Too often the FOOL rushes in to rake SIRI over the coals. It's getting to be 'old hat'.

  • Report this Comment On September 26, 2011, at 3:30 PM, my2cents4u wrote:

    Rex Moore = Rocco Pendola

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