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What’s All the Fuss About Sirius XM Radio?

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Everyone loves a fast-growing share price. In addition to rewarding current investors, it gives prospective investors the opportunity to jump on the bandwagon in the hopes that shares will keep rising. This has been especially true with shares of Sirius XM Radio (NASDAQ: SIRI  ) .

With shares of the satellite radio provider rising by 32.4% since the beginning of the year, far outpacing the 18.7% of the S&P 500, there is no doubt that the company has been popular with investors. And rightfully so! When looking at the company's recent quarterly growth, it is clear why investors are excited. Over the past quarter alone, revenue has risen by 12.3% compared to the same quarter a year ago. More impressive still is the company's free cash flow growth. Despite the company's earnings being impaired by acquisitions, its free cash flow managed to grow by 54.8% for the first two quarters of this year compared to the same quarters in its 2012 fiscal year.

On top of the company's growth though, investors have become excited about two other things: margins and share buybacks.

Looking first at margins, we see that the company has seen a rather substantial increase in both its gross profit and operating margins over time. In short, the increase in the company's gross profit margin and operating margin has been attributable to it achieving economies of scale in terms of content, equipment, and other costs as it increases its market presence.

Pandora Media

Interestingly, when looking at Pandora Media (NYSE: P  ) , an Internet provider of radio services, we see a distinctly different trend in regards to its gross profit margin and operating margin. Whereas Sirius XM Radio's margins have been improving, Pandora Media's margins have slipped considerably. The decline in its gross profit margin has been primarily attributable to higher content acquisition costs as listener hours have increased, while its operating margin has been affected by higher employee-related expenses.

Based on this data, it would appear that Sirius XM Radio is the more attractive prospect. However, it would be easy to rationalize that Pandora Media is investing in itself now so that it may garner higher listener counts and, ultimately, higher profitability in the future. Though I tend to prefer a safer company that requires little investment to grow, Pandora Media may ultimately yield higher growth in the future. As such, it may be more attractive for investors seeking growth opportunities.

Share buybacks
In addition to attractive growth and improving margins, Sirius XM Radio has another thing going for it: it's investing in its future success. How, you might ask? Well, back in December of 2012, the company announced that it was planning on buying back as much as $2 billion worth of its own shares, amounting to a huge vote of confidence. Since the announcement, the company has acquired around $1.6 billion worth of shares. This alone is attractive enough. With only $400 million left under the original plan, however, the company announced another $2 billion share buyback this past week. This illustrates to shareholders just how much the company believes in itself.

As part of the transaction, the company agreed to acquire $500 million worth of shares from its majority owner, Liberty Media Corporation (NASDAQ: LMCA  ) , a media conglomerate which will still own around 51.6% of Sirius XM Radio following the acquisition. In accordance with its announcement, Sirius will buy $400 million worth of shares from Liberty in accordance with its previous but unfilled $2 billion buyback from 2012, and will buy the remaining $100 million under its recent $2 billion buyback program.

Although the remaining $1.9 billion of the company's recent $2 billion buyback may be acquired over time and at the company's discretion, it will be required to buy at least $130 million worth of shares from Liberty Media in November, $270 million in January of 2014, and the remaining $100 million in April of 2014. Even though this puts some obligations on the company, it is benefited by the fact that the deal stipulates that the shares it acquires from Liberty Media will essentially have a ceiling price of approximately $4.12 and a floor of $3.59. This means that even if the company's shares skyrocket, it will still buy between roughly 121 and 139 million shares for its $500 million in cash.

But is it worth it?
Based on the data discussed above, it's clear that Sirius XM Radio presents prospective and existing investors with some attractive opportunities. In addition to having attractive growth and margins, the company is returning money to shareholders in the form of share buybacks. These are all attractive catalysts, but just because something looks good doesn't mean you should necessarily buy it. You see, while the company seems to have a certain appeal, the Foolish investor should be mindful of the price they are paying for the value they receive.

In the case of Sirius XM Radio, that price is high. By buying shares today, investors are paying 43.4 times 2013 estimated earnings and 32.6 times 2014 estimated earnings. Another way to look at the situation is from a free cash flow perspective. Using the company's 2012 free cash flow per share and comparing it to its current price, investors are paying a steep 29 times. This doesn't mean that Sirius XM Radio is a bad investment, of course. Rather, it might just mean you will have to wait a while for it to pay off, which isn't always a terrible thing if you are holding for the long-term.

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Read/Post Comments (5) | Recommend This Article (4)

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 October 17, 2013, at 2:57 AM, tjtoretire wrote:

    You think Sirius has to wait a while before it takes off? As you stated it is already up 32.4% YTD. Looks like take- off has already started. Look for a pop to $4.25 once 3rd quarter earnings are released.

  • Report this Comment On October 17, 2013, at 5:37 AM, Austin77478 wrote:

    The author seems like he was left behind. The more these so called writers like CN doubt Sirius, the more Sirius matches forward.

  • Report this Comment On October 17, 2013, at 7:32 AM, 67vair wrote:

    This author is late to the party. Also, the price is high? That's what uninformed writers were saying at $2 and $3 per share. Get some knowledge before publishing

  • Report this Comment On October 17, 2013, at 8:49 AM, Varchild2008 wrote:

    What does the current statistics on earnings multiples have abything to do with SIRIUS XM in 2014?

    The article fails to mention the end of the year acqyisition of Agero telematics division. Untill we see a few earnings reports in 2014, I'd think it tough to believe or trust in the earnings multiples. Need to see what effect the acquisition may have on the balance sheet first.

  • Report this Comment On October 17, 2013, at 6:58 PM, BillFromNY wrote:

    I really don't think that, when you have a company that is really doing something revolutionaere you can track value by the humble old Trailing PE metric. [I]LinkedIn[/l] for example. has a trailing PE of over 900. This doesn't bother the Fool with whom it is still a prized holding. ( it didn't bother them

    Facebook is an example of what happens when you try to change everything about the way that you keep in touch with old friends and family members that have scattered all over the country. Facebook will eliminate hastily scribbled notes on Christmas cards and replace it with photos of new grandchildren online.

    There will be technical glitches, as there were since the Jacsonville Fourts Field guitar.

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Related Tickers

9/29/2016 11:02 AM
LMCA $29.14 Up +0.09 +0.31%
Liberty Media CAPS Rating: ****
P $14.30 Down -0.11 -0.76%
Pandora Media CAPS Rating: **
SIRI $4.19 Up +0.03 +0.60%
Sirius XM Radio CAPS Rating: **