Sirius XM Holdings Inc: A Strong Buy

Sirius XM Radio  (NASDAQ: SIRI  )  has been doing well, but the company's stock price hasn't. After its recent earnings report, shares fell even though it reported record subscribers, revenue, and free cash flow. Even if the company doesn't complete the deal with Liberty Media  (NASDAQ: LMCA  )  to go private, the stock has the potential for price appreciation due to its strong financial position and growth in operating metrics.

Strong fundamentals 
In 2013, revenue increased 12% year over year to $3.8 billion. And Sirius XM added 1.66 million subscribers in 2013, capping off the year with 25.6 million customers. In 2013, the operating income of Sirius hit record highs to $1.04 billion, which points to an operating margin of 27.5%.

Net income stood at $377 million, which translates into an earnings per share of $0.06. Sirius XM is generating a ton of free cash flow, which increased 31% in 2013 to $927 million. The company bought back 520 million shares for $1.76 billion last year, and there is still more than $2.2 billion of share buybacks that are yet to be executed. The remaining $2.24 billion repurchase authorization represents more than 10% of the company's market cap of roughly $21 billion, so the company is clearly betting big on its future.

Metrics are growing
The company's self-pay subscribers increased to 21.08 million from the prior quarter of 20.67 million. And the conversion rate of new vehicles stood at 42% while the churn-rate of self-pay users increased to 1.9% from 1.8% in the prior quarter. These two factors were negatively affected by one major OEM, which shifted to unpaid trials from paid ones, and caused net additions to decline by roughly 23,000 subs in the fourth quarter.

However, the company's average revenue per user, or ARPU, grew to $12.46 which is a notable increase from $12.12. And also the subscriber acquisition costs of Sirius declined to $42 per gross addition as the company is aggressively expanding its footprint. The company's satellite radios have been installed in more than 60 million cars, and is hoping to increase this to 110 million in the next five years. 

Broadening the addressable market
The company's future growth can be expected to flow from the used car market in the U.S., which is 3 times the size of the new car market. Sirius XM expects that the number of pre-owned cars, with satellite radios, should surpass the number of new cars with its radios in the next few years. The company's conversion rate among used cars is 34%. It's trying to reach more used car owners when they service their vehicles with participating dealers by providing free trial offers.

New car sales in the U.S. stands at roughly 16 million units per year, and that should aid the company's subscriber growth. Sirius has been able to penetrate 71% of new cars in 2013, and the company's management anticipates that penetration rate to be 70% in the current year. 

And since Sirius has revenue-sharing agreements with a number of OEMs, the interests of both parties are well-aligned. Sirius is the world's largest radio broadcaster, but the company still faces decent competition from free terrestrial radio as well as Pandora Media  (NYSE: P  )  Pandora is the leading Internet radio service with more than 73.4 million active listeners at the end of Jan 2014. In addition, Pandora is working on automotive partnerships with leading car-makers such as General Motors, Toyota, and Nissan.

But Sirius XM offers a commercial-free radio experience and includes differentiated content including music, news, sports, and talk shows, which represents a different experience relative to Pandora, Spotify, and terrestrial radio. And Sirius is also strengthening its OEM relationships; the company increased its penetration at Honda and Toyota in 2013 and extended its agreement with Nissan for all models to 2018.

Sirius XM has taken steps to diversify its revenue streams through the acquisition of leading telematics services provider Agero, which will enable it to generate more revenue through safety and security-related solutions and also strengthen its relationships. The connected-vehicles segment is expected to earn revenue of almost $100 million this year and grow in double digits the next few years.

Going forward
The subscription business model of Sirius XM ensures that the company's cash flows are reasonably predictable and consistent. Its operating margin expanded to 27.5% in 2013 from 25.6% in 2012, and the scalability of its business model will aid further margin expansion in 2014 and beyond. In addition, the company is buying back more than 10% of its outstanding stock, which should lead to a higher EPS.

A higher bid from Liberty Media, from the existing $3.68 per share all-stock offer, or by remaining public, Sirius XM still has a lot of upside from its current levels. It's hoping to add 1.25 million net new subscribers, generate record revenue, and free cash flow.

Sirius XM is already one of the largest subscription media companies in the world, and in the distant future would like to expand its footprint in the International market. All these factors could pave the way for huge upside.

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Read/Post Comments (12) | Recommend This Article (7)

Comments from our Foolish Readers

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  • Report this Comment On February 12, 2014, at 2:21 PM, sirifair6 wrote:

    Ishfaque

    "Even if the company doesn't complete the deal with Liberty Media (NASDAQ: LMCA ) to go private,..."

    Even if the liberty hostile takover happens, that I will vote against with my quite substantial holdings, sirius will be part of liberty media that is a PUBLIC company. There will be no private companies as the result of this acquisition for now.

    I agree with the rest of your analysis.

  • Report this Comment On February 12, 2014, at 2:23 PM, sirifair6 wrote:

    Ishfaque

    "Even if the company doesn't complete the deal with Liberty Media (NASDAQ: LMCA ) to go priv

    ate,..."

    Liberty Media is a PUBLIC company and, if the hostile takeover happens that I will vote agains with my large holdings, sirius may become only PUBLIC rather than private!

  • Report this Comment On February 12, 2014, at 3:16 PM, TJR wrote:

    Stock never goes anywhere on these pump and dump articles.

  • Report this Comment On February 12, 2014, at 3:37 PM, Guggerpaul wrote:

    First you do a hit piece "Siri is doomed" and leave out all kinds of information then you do this story and tell a lot of the truth, what happened? Malone give the ok? I for one will vote "NO" to any deal with Malones name on it.

  • Report this Comment On February 12, 2014, at 4:01 PM, ddeleo wrote:

    So if you are Liberty and you sit on the board as a majority and you know you are going to buy the company and the 2 Billion dollar buyback is going to include buying some of Libertys shares, then I'm guessing this is pointless and why the buyback has not and probably will not occur. If anyone can see their way to clarifying what incentive liberty has to vote to initiate the buyback, please help clarify this for me.

  • Report this Comment On February 12, 2014, at 4:51 PM, ishfaque wrote:

    @ ddeleo: Sirius has halted its share buyback of ~$2.2 billion, until the issue of the takeover is resolved. If the acquisition goes through, very likely Liberty will blend the Sirius share repurchase program into its own. And if the acquisition doesn't take place, it will resume its usual course of being a regular public company and continue buybacks.

  • Report this Comment On February 13, 2014, at 2:20 PM, Beerman51 wrote:

    I like the part where it is stated that we already know P has 73 Mil active listeners at the end of this year.

    P seems to be a darling for the trading crowd, but I can remember the twin sat rad co's doing real well with traders.

    The funny thing , well not so funny really!

    Siri has great cash flow and all they have to do is flip the steaming switch with new subscribers and BAMM.

    They don't do that thow, why because they are making money very well without using that ammo

  • Report this Comment On February 13, 2014, at 2:21 PM, Beerman51 wrote:

    Streaming ( insert )

  • Report this Comment On February 13, 2014, at 2:23 PM, Beerman51 wrote:

    I like the part where it is stated that we already know P has 73 Mil active listeners at the end of this year.

    P seems to be a darling for the trading crowd, but I can remember the twin sat rad co's doing real well with traders.

    The funny thing , well not so funny really!

    Siri has great cash flow and all they have to do is flip the steaming switch with new subscribers and BAM

    They don't do that though, why because they are making money very well without using that ammo

  • Report this Comment On February 13, 2014, at 2:24 PM, bobsar49 wrote:

    I'm long SIRI. Siriusxm is really NOT commercial free. There are ads on all channels for everything EXCEPT music. Sports, talk, nesw all have ads and plenty of them. Its not clear which of those are just rebraodcasts like sports and which ads contribute to revenue but they are most definitely not ad free.

  • Report this Comment On February 15, 2014, at 9:36 AM, Varchild2008 wrote:

    bobsar49, that is misleading a bit. When the talk is from a SIRIUS XM personality there arent any Ads. When it is from a public radio personaloty there are Ads.

    However, the Ad count has dropped significantly on Patriot radio given the addition of The Blaze News reports during the breaks.

    Some of the other channels are based on Television a d Television has Ads. What do you want? Endless stream of silence while the Television Ads are playing through the breaks?

    Also, Comedy channels are all commercial free. It isnt just the musuc channels.

  • Report this Comment On February 15, 2014, at 5:17 PM, ishfaque wrote:

    Ads are very limited and mostly from outside and curated programs, not Sirius XM programs.

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