Is Sirius XM Radio the Perfect Stock for 2012?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Sirius XM Radio (Nasdaq: SIRI  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Sirius XM Radio.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 41.5% Pass
  1-Year Revenue Growth > 12% 7.6% Fail
Margins Gross Margin > 35% 62.5% Pass
  Net Margin > 15% 9.2% Fail
Balance Sheet Debt to Equity < 50% 492.9% Fail
  Current Ratio > 1.3 0.48 Fail
Opportunities Return on Equity > 15% 62% Pass
Valuation Normalized P/E < 20 43.67 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With only three points, Sirius XM Radio has some room for improvement. But it's hard to argue with a stock price that jumped almost 12% in a flat year for the overall market, although the stock gave back much larger gains from earlier in the year.

After the merger of the two big competitors in satellite radio, Sirius XM stood alone in the space. But that doesn't mean that the company doesn't have competition. Although conventional radio hasn't posed much of a threat to Sirius XM's wide lineup of choices, the recent IPO of Pandora (NYSE: P  ) highlighted the battle in bringing streaming radio to vehicles via smartphones and wireless Internet. Both Ford (NYSE: F  ) and Toyota (NYSE: TM  ) now have cars that offer Bluetooth streaming, which means that these companies are less dependent on Sirius to provide radio options that car buyers want, and Sirius in turn can't count on new vehicle sales to automatically drive growth -- or pose a wide moat to Pandora and other competitors.

But Sirius has done a good job with its fundamentals. The company became profitable and cash-flow positive in 2011 and saw increased subscriber counts.

The big question going forward is whether its planned rate increase will go well. With streaming video, Netflix (Nasdaq: NFLX  ) made a misstep in hiking its rates by a whopping 60% on some of its users. That hurt the company, but it also provided an object lesson to Sirius. The satellite radio company's 12% increase looks a lot easier to swallow.

Going forward, Sirius needs to demonstrate that its offerings are stronger than anything the Internet can provide. That could be a tough test, and with high debt levels and rich valuations, Sirius has little margin of error if it falls short. If it succeeds, though, then it could get back on the road toward perfection in a hurry.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Sirius XM Radio to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Netflix and Ford, as well as creating a synthetic long position in Ford. 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 Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (5)

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 January 03, 2012, at 10:20 AM, sirifire wrote:

    Dan,

    A few observations.

    First, Sirius XM has been in existence 3.5 years rather than 5. You should know that.

    Second, I wonder how you arrived to normalized P/E of 43.67. Last time I calculated it was about 23 for 2011. Check your math.

    Third, could you explain your math behind debt to equity where you get 492.9%.

    Fourth, net margin for the year is going to be much higher that 9.2% and will most likely approach 15%

    Fifth, major contributors to growth in 2012 will be a combination of used car market, accelerated OEM growth rate, sat radio 2.0 impact, in particular on Hispanic market, and some impact from the price increase.

    By my account, siri meets 50% of your parameters and will be one of the most rewarding stocks in 2012. Profit and fcf growth will be in particular remarkable. Mark my word!!!

  • Report this Comment On January 03, 2012, at 11:40 AM, NYANGLER wrote:

    Sirifire Thank you, great response.Just want to add a 12% raise sounds like a lot,but it comes out to 5 cents a day.Dan be honest, how many subscriptions will be cancelled .

  • Report this Comment On January 03, 2012, at 1:34 PM, deanesp wrote:

    Howard and siri now howard will be exposed on national tv

  • Report this Comment On January 03, 2012, at 4:00 PM, dsandman999 wrote:

    Netflix was a disaster that ALL companies, public or private should learn a lesson from. Price increases, especially after a 2 year freeze, should be expected and a 12% one is not that large.

    I can't wait for the horror stories about roaming charges in Canada when the kids are listening to Pandora over a Cell phone linkage...

    Also, what are the datarate usage of a Pandora session per hour? Are they going to hit the 2 Gig limits on AT&T and Verison if the radio is on 24/7 all month?

  • Report this Comment On January 03, 2012, at 8:46 PM, TMFGalagan wrote:

    @sirifire -

    Five-year growth reflects Sirius's existence before the merger. If you add revenue from pre-merger in, it reduces the growth rate somewhat.

    Normalized earnings came from S&P Capital IQ, using $0.042 as TTM normalized EPS. I note that's virtually identical to unadjusted trailing EPS for P/E purposes.

    Debt/equity reflects debt of $3.03 billion divided by equity of $615 million as of 9/30/11.

    As for forward projections, I'll take another look next year and see if SIRI got up closer to a perfect 10. Thanks for your comments.

    best,

    dan (TMF Galagan)

  • Report this Comment On January 04, 2012, at 4:02 PM, DJDynamicNC wrote:

    Reason #2,462 why I love the Fool: everybody expects that it's perfectly fair to call out published columnists on their claims and those columnists don't take it personally but respond by backing up their facts.

    If every community was run in this manner the world would be immeasurably smoother to run.

  • Report this Comment On January 06, 2012, at 8:07 PM, Billyhld wrote:

    Quick question: When you are evaluating the P/E, what companies are you comparing to? I am trying to determine if the 25x is appropriate or if it should be trading lower at the ratio of say, a cable provider.

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