Is Sirius XM Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Sirius XM (NASDAQ: SIRI  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs below tell Sirius XM's story, and we'll be grading the quality of that tale in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Sirius XM's key statistics:

SIRI Total Return Price Chart

SIRI Total Return Price data by YCharts.

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

33.9%

Pass

Improving profit margin

156.7%

Pass

Free cash flow growth > Net income growth

388.8% vs. 243.6%

Pass

Improving EPS

211.2%

Pass

Stock growth (+ 15%) < EPS growth

215.3% vs. 211.2%

Pass

Source: YCharts. *Period begins at end of Q3 2010.

SIRI Return on Equity (TTM) Chart

SIRI Return on Equity (TTM) data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(86.6%)

Fail

Declining debt to equity

(88.6%)

Pass

Source: YCharts. *Period begins at end of Q3 2010.

How we got here and where we're going
We looked at Sirius XM last year, and it has once again earned six out of seven possible passing grades, the same as it did last year. That's still quite impressive, since few companies can manage to grow so briskly for years at a stretch without something falling by the wayside. Promising revenue growth, improving profit margins, and declining debt-to-equity levels all contributed to Sirius XM's good showing today. How might Sirius XM attack its one weakness -- a declining return-on-equity level -- to gain that rare perfect score next year? Let's dig a little deeper to find out.

Sirius XM is poised to benefit from a long-awaited rebound in the U.S. automobile market, as it expects to soon push the number of both its active and its dormant receivers beyond 50 million. But the company is also diversifying into promising new arenas, as it's acquired Agero's connected vehicle services business for $530 million in cash, which will enable it to strengthen its market position in telematics services. The deal could pose a threat to General Motors' OnStar, since that service alone now costs $19.95, which is more than Sirius XM's satellite subscription despite the fact that a number of drivers can get similar services on their smartphones. But tying telematics to satellite radio could bring in a number of on-the-fence customers who are either behind the smartphone curve or who prefer the premium service OnStar-type offerings are supposed to provide.

Longtime Fool contributor Rick Munarriz notes that Sirius XM has also expanded its existing business relationship with automaker Honda, which will run through 2020. Honda's American subsidiary has agreed to install Sirius XM's radio receivers in its entire lineup, from the premium Acura badge to the compact Honda Fit and hybrid Insight. Sirius XM has also been trying to bolster its position in Latin America, as it's recently launched a Sirius XM Espanol satellite package for just $5.99 per month. The company also announced a huge $2 billion stock repurchase program, which will include $500 million of common stock held by majority stakeholder Liberty Media, which is expected to close by April 2014. That's a big turnaround from the onetime cash-bleeding company near bankruptcy.

But Fool contributor Dan Newman notes that Apple's iTunes Radio streaming platform, which has brought in more than 20 million iOS 7 users since its release, could present a major threat to both Sirius XM and Pandora -- at least if Apple ever decides to go all-in with content acquisition. That seems unlikely, based on Apple's history, so this may become a net benefit for Sirius XM if it muscles an in-car competitor out of the way. At the moment, Apple's new service is primarily a threat to straight-up streamers.

Fool contributor Adrian Campos points out that Sirius XM's ability to acquire premium content while offering reasonable prices allows it to lure more listeners than might be otherwise drawn to Internet radio competitors. But Sirius XM has recently announced an increase in its core monthly subscription to $14.99 from January onward, which points to a strengthening of its pricing power despite such competition. In its latest quarter, the company's net subscriber pool increased by 513,000 users to 25.6 million, and CEO Jim Meyer believes that customers will not cancel their subscriptions due to a price increase, as they perceive substantial value in these premium offerings.

Putting the pieces together
Today, Sirius XM has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

6 great growth stocks
Tired of watching your stocks creep up year after year at a glacial pace? Motley Fool co-founder David Gardner, founder of the No. 1 growth stock newsletter in the world, has developed a unique strategy for uncovering truly wealth-changing stock picks. And he wants to share it, along with a few of his favorite growth stock superstars, WITH YOU! It's a special 100% FREE report called "6 Picks for Ultimate Growth." So stop settling for index-hugging gains... and click HERE for instant access to a whole new game plan of stock picks to help power your portfolio.


Read/Post Comments (0) | Recommend This Article (0)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2716886, ~/Articles/ArticleHandler.aspx, 10/23/2014 5:38:56 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement