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The Motley Fool has been making successful stock picks for many years, but we don't always agree on what a great stock looks like. That's what makes us "motley," and it's one of our core values. We can disagree respectfully, as we often do. Investors do better when they share their knowledge.
In that spirit, we three Fools have banded together to find the market's best and worst stocks, which we'll rate on The Motley Fool's CAPS system as outperformers or underperformers. We'll be accountable for every pick based on the sum of our knowledge and the balance of our decisions. Today, we'll be discussing Sirius XM Radio (Nasdaq: SIRI ) , the dominant satellite-radio provider.
Sirius XM by the numbers
Here's a quick snapshot of the company's most important numbers.
Result (TTM or Most Recent Available)
|Market Cap||$9.4 billion|
|P/E and Forward P/E||30.9 / 22.6|
|Net Income||$457 million|
|Free Cash Flow||$438 million|
|Long-Term Debt||$2.63 billion|
|Active Subscribers||22.9 million|
|Acquisition Cost per Subscriber||$60|
Sources: Morningstar and company earnings releases. Does not include results of most recent quarter.
Sirius has certainly attracted a legion of loyal investors, some of whom have ridden the former 5-cent stock to 10-bagger or greater gains. But while it began that rise as a very speculative investment, it seems to have matured into a very strong company with a lot of headwinds behind it. Subscriber growth, which hasn't been too shabby in prior years, may even be gaining steam:
Subscribers at End of Period
Growth From Prior Period
|2008||19.00 million||N/A *|
|First half 2012||22.90 million||4.6%|
Sources: company earnings releases. *Sirius and XM Radio merged in 2007.
Stretching first-half growth out for the entire year would give Sirius a 9.2% annual growth rate in 2012. But there are still a lot of cars unconquered. Sirius' 1 million new subscribers for the first half of the year represent only about 14% of total new car sales for that period. That's a slight improvement over last year's slice of the auto-sales pie, as Sirius' new subscribers represented 13% of total auto sales in 2011.
This gradual growth trend has more support than you might think, considering that the average age of cars in the United States is at an all-time high. Consumers have to upgrade eventually, and even if they choose used cars, Sirius has options for them -- the company recently partnered with Penske Automotive Group (NYSE: PAG ) to offer three-month free trials for anyone buying a used car with an existing receiver.
Sirius isn't "cheap" by some measures, but it's certainly far more reasonably valued than Pandora Media (NYSE: P ) , widely cited as Sirius' chief competition despite its continued inability to turn a profit. As Sirius gains subscribers, its profitability tends to improve, in contrast with Pandora's widening losses with every new quarter. I sure wish I'd found this stock in 2009, but I still think it has more growth ahead. That's why I'm giving it my support and making the outperform call today.
Relax … for once, you won't get vehemently negative blather out of me when it comes to Sirius XM, but that doesn't mean I'm not still skeptical about its turnaround.
Sirius XM has a lot going for it at the moment. As Alex pointed out, subscriber growth is beginning to ramp up as the reality that Pandora doesn't have a chance of competing with Sirius begins to set in with consumers. The company was moderately cash flow-positive in the first-quarter, by $15 million, as self-paying subscriptions rose by nearly 300,000. Average revenue per user, the most important factor when examining fee-based companies, rose by $0.25 to $11.77.
Sirius has really benefited from a resurgence in automotive demand, as indicated by General Motors (NYSE: GM ) and Ford's (NYSE: F ) year-to-date unit sale gains of 18% and 15.6%, respectively, and has been able to pass along price increases to consumers.
Still, there's that skeptic inside me that simply won't allow me to recommend this stock as a buy. Take its long-term debt of $2.95 billion. Sure, Sirius XM paid down $57 million in debt over the past three months -- but we're talking nearly $3 billion here. It's not as if shareholders would be willing to put up with another share offering. Sirius is working to pay down and refinance about $1 billion worth of debt due over the next 15 months, but it's just pushing an inevitable storm out a few more years.
I'm also concerned about the company's still-high subscriber acquisition costs (SACs), which rose to $60 in the first-quarter from $57 in the fourth quarter. Sirius proclaimed that this was from higher subsidy costs related to OEM installations, which I can somewhat buy. But what happens if SACs start growing faster than ARPU? The answer: We're right back where we we're in 2008!
The next 12 to 15 months will be crucial for Sirius when it comes to refinancing some of its debt, working on its cash flow, and reducing its costs, all while crossing its fingers and hoping the market for new cars continues to buck the trend and remain robust. The latest consumer spending figures weren't encouraging at all, and for all these reasons listed, I'd rather wait on the sidelines than dip my toes into Sirius XM.
So let me get this straight -- Sirius XM has to subsidize OEMs to entice them to put Sirius XM radio-ready receivers in their cars, and that's the big driver of subscriber growth? Relying on the health and whims of others isn't where I would want my business to be.
Let's be clear: I think Sirius XM is a great product for people who drive across the country, live in areas with poor radio or cellular reception, or love Howard Stern. But as someone on the other side of that spectrum, I can see how it's not attractive for those of us who don't fit the target market.
Pandora clearly hasn't been the threat some thought it might be, but I really think competition will only heat up as smartphones become more common and networks get faster. Sirius XM mitigates some of that risk with smartphone apps, but the fact that the company offers these apps to smartphone users shows that its competitive advantage isn't strong with a lot of subscribers. As more options become available, the content advantage the company has will dwindle as characters like Howard Stern and even major sports franchises experiment with direct delivery of content on-demand, providing them with more options to monetize their programs.
But my biggest problem with Sirius XM is that the company just doesn't make enough money consistently for me to overcome what I view as a tenuous position in the market. Sean highlighted the company's $2.9 billion debt load, which comes with a $73 million monthly interest payment as of last quarter. That's nearly 9% of revenue and trails only revenue sharing and royalties and subscriber acquisition costs on the cost side of the income statement.
Sirius XM has had impressive growth recently, and the company is now making a solid profit, but I don't see the satellite-radio business as something I would put my money in long-term. I don't think the stock is worth an underperform call, considering Liberty Media's likely eventual takeover, but I just don't think the stock will outperform the market as competition from smartphones starts to get smarter and grow.
The final call
Since only one of us (Alex) is willing to go bullish on Sirius today, and since Sean and Travis aren't sold on betting against this stock, it looks like we'll have to sit on the sidelines for this one. Our TMFYoungGuns CAPS portfolio is beating the indexes by a whopping 121 points as of this writing after only 13 calls, so we must be doing something right so far.
You shouldn't end your research into Sirius here just because we three Fools couldn't agree on its direction. The Motley Fool has our top analysts on the Sirius case, and they've put together an excellent premium research service that comes with a year of free regular updates. Get the inside information you need on Sirius XM today.
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