Remember the tagline for Smucker's (NYSE: SJM ) jelly? "With a name like Smucker's, it has to be good." There's an apparent logic to that. Of course, the company got its name from its founder, not the quality of the condiment.
But I digress. Today I want to propose an anti-tagline -- not for Smuckers, for Sirius (Nasdaq: SIRI ) : "With a name like Sirius, you'd think we'd be more serious about our business. But you'd be wrong."
Not as catchy as the Smucker's line, I admit. Still, my tagline has one thing going for it that Smucker's didn't -- it's true.
Nobody likes to pay for insurance
But we all know that it's the prudent thing to do. You may not like writing that $300 check every year, hoping as you write it that your house won't actually burn down, but on the day you smell smoke, you're going to be awfully glad you put pen to paper. And the knowledge that the risk of loss exists motivates you to spend the money to insure your investment in your home.
Similarly, when you're managing a public company, it's not just prudent to insure your business assets. It's your fiduciary duty to protect your shareholders' investment by insuring the three satellites on which your business depends.
And yet ... Sirius does not. Quoting directly from the company's Form 10-K:
"Failure of our satellites would significantly damage our business... we do not have insurance covering our in-orbit satellites....If one of our three satellites fails in orbit, our service would be impaired until such time as we successfully launch and commission our spare satellite, which would take six months or more. If two or more of our satellites fail in orbit in close proximity in time, our service could be suspended for at least 24 months." [Emphasis added.]
In other words, if Sirius loses one satellite, its business would almost certainly collapse. If a second satellite fails, you can remove the "almost" from the preceding sentence. Amazingly, although Sirius sees this risk, the company does nothing to insure against it. What's even more amazing is that, despite this risk being clearly disclosed in the company's 10-K, investors still entrust their money to Sirius -- especially when the company's explanation for its failure to insure its satellites is so transparently false:
"In 2004, we discontinued our in-orbit insurance policies covering our satellites following a review of ... the exclusions from coverage contained in the available insurance; the costs of the available insurance;the practices of other satellite companies as to in-orbit insurance...." [Emphasis added.]As a serious Sirius bear, it is that last line that I really focus on. Because conditions that affect Sirius's ability to insure against the risks to its satellites are not unique to Sirius -- they're industry-wide. Sirius suggests that the consensus opinion among satellite companies is that it's simply not worth paying for insurance. That is patently untrue.
Before you buy Sirius's argument -- or its stock -- it's worth reviewing the facts. I've examined the 10-K disclosures of each of the companies in this industry, and except for Sirius, every single company out there insures itself in one way or another.
XM Satellite (Nasdaq: XMSR ) does. So does DirecTV (NYSE: DTV ) . And PanAmSat (NYSE: PA ) . And New Skies (NYSE: NSE ) , too. The lone holdout, aside from Sirius, is EchoStar (Nasdaq: DISH ) , operator of the "Dish" satellite TV system. But even there, the two situations aren't comparable. EchoStar has four times the number of satellites in orbit as Sirius does, permitting it to cover the loss of a single satellite by shifting its responsibilities to one of the remaining 11. What's more, EchoStar keeps twice as much cash on its balance sheet as Sirius does. While technically EchoStar doesn't have an insurance policy on its satellites, the company "self-insures" by keeping enough cash lying around the house to pay out-of-pocket for any disasters.
That's just plain common sense. What makes no sense is investing in a company that doesn't bother to protect your investment.
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