Shares of
XM Satellite Radio (
Nasdaq: XMSR ) climbed higher yesterday after Morgan Stanley upgraded the company to
overweight. Usually when I hear about XM putting on a little extra weight, it's a reference to the 6.5 million subscribers that have gone right to its hips since the service launched a few years ago.
This doesn't have anything to do with XM putting on a few pounds, although the shares have been pounded by the market over the past year. It's just the silly language that analysts use to describe something that should be far easier to get across.
Honey, do I look fat in this stock rating?
I'm not a fan of analyst ratings. I understand what firms are trying to get across, but I just have to chuckle when I see a stock that is downgraded from "strong buy" to "buy," or upgraded from "strong sell" to "sell."
Even in the mainstream, the "buy, sell, or hold" fork in the road has one prong too many. Rating a stock should be a binary process. One or nil. On or off. Buy or sell. There is nothing as ludicrous as a "hold" suggestion, especially when it's being dispensed to someone who doesn't own the stock in the first place.
Our stock newsletters give it to you straight. If it's an active recommendation, it's a buy. If things like a shift in fundamentals or wide swings in valuation make the selection unattractive, it gets tagged with a sell recommendation.
That's the way it should be. Call-in shows should never ask "buy, sell, or hold" when it's just a matter of yes or no. Yes, buy it. No, drop it. Here, Morgan Stanley is suggesting that investors overweight their portfolio with XM as opposed to keeping a neutral stance. That may work for mutual fund managers with positions in every stock in the universe, but I just don't see the value in it for individual investors.
Eat something, please
Ironically, XM has been shedding a whole lot of weight lately. Since the shares peaked at just more than $40 before the 2004 holiday shopping season, it's been a rocky road down to the high teens.
Making matters worse: As a firm believer in the potential of satellite radio as a disruptive technology, I recommended the shares to Rule Breakers newsletter subscribers this past autumn, figuring that the carnage was over. It wasn't.
XM and Sirius (Nasdaq: SIRI ) are amazing companies, but they're donning some pretty slim gowns these days. Both stocks peaked around the same time, shortly after Howard Stern announced that he was leaving CBS (NYSE: CBS ) for Sirius, yet both stocks now trade for less than half of their 2004 highs.
That's not right. Let's take a closer look at how the companies were doing just before Stern's announcement sent the shares peaking, and where they stand today.
| Subscribers |
Q3 2004 |
Q1 2006 |
| Sirius |
662,289 |
4,077,747 |
| XM |
2,516,023 |
6,501,859 |
You can't be the only one scratching your head. Since Stern's announced exit from terrestrial radio, Sirius has gone on to add 3.4 million new net listeners and XM has landed nearly 4 million new subscribers. As a whole, satellite radio's base has grown from 3.2 million to 10.6 million accounts.
These aren't just more ears. Thanks to a 30% price hike that XM instituted last spring, these new users are paying more for their service. It's not just about the monthly premiums, either. Sirius has been a beast in lining up advertisers, and XM has partnered with Napster (Nasdaq: NAPS ) to tap into some digital downloading royalties.
Critics argued that folks loading up their Apple (Nasdaq: AAPL ) iPods with music wouldn't want radio -- much less pay for it -- but satellite radio receivers have been flying off shelves, despite the iPod Revolution.
Stop stalling and set the table
XM and Sirius aren't half the companies they used to be, even if they are being valued that way. There have been hiccups along the way, particularly for XM in recent quarters, but both stocks deserve better than this.
Both companies are now just quarters away from turning operating cash flow-positive. The current steep losses were expected. The nature of the business, with high fixed costs and low variable overhead, will mean great things, as profits grow exponentially once the companies lap their breakeven marks.
These are growing companies with clear paths to relevance. They're not like their overseas peer, WorldSpace (Nasdaq: WRSP ) ; it may be a global winner in a few years, but it's still far from being a viable investment at the moment. XM and Sirius are making it happen now.
This past quarter saw XM doubling its revenues to $209 million, and reining in the subscriber-acquisition costs that had spooked investors in the December quarter.
So what's the deal here? Is XM overweight, or is the wait over?
If you've been jaded by the lofty valuations tied to XM and Sirius, you may want to pull up a quote. The prices might be just where you figured a sensible investor would buy in, and the industry's fundamentals only continue to get brighter.
Eat up.
XM is an active recommendation in theRule Breakersnewsletter service. The stock is trading lower, but that isn't the norm with the stock-selection service. The average pick is up 18.7%, while the S&P 500 has mustered a mere 6.9% average advance in that time. Check out a free trial to discover the newsletter's biggest winners, including two brand-new picks from last night.
Longtime Fool contributor Rick Munarriz has been a Sirius satellite subscriber since 2004, but he does not own shares in any of the companies mentioned in this story.The Fool has a disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
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