What do blitzing outside linebackers and Sirius XM Radio (Nasdaq: SIRI ) have in common? They all want to get the quarterback. Get it? Quarter back?
Unfortunately, this is no laughing matter to suffering shareholders, now coping with a stock that closed yesterday below the $0.25 mark.
Since the shares have been roughly halved since last month's "5 Reasons Why Sirius XM Is at $0.43" article, I figured I would revisit those five reasons. Are they still valid? Is the company really half the company it used to be?
The answer to the last question is "of course not." The company's market cap may have been sliced in half over the past five weeks, but it's actually a much smaller fraction of the company's enterprise value once you tack on the long-term debt.
Now let's get back to the first question. Are the five reasons for the company's slump still valid?
1. It's the shares outstanding
The completed merger between Sirius and XM is beneficial in many ways, but not to fans of lean financial statements. With roughly 3 billion shares outstanding, it's going to take a lot of revenue and earnings to divide into that gargantuan sum to justify a price back in the double digits, and maybe even the single digits.
Naturally, before you even begin to brush up on the long division, you also have to factor in the $3.4 billion in long-term debt.
There aren't too many stateside companies with more shares outstanding than Sirius. The bluest of the blue chips like General Electric (NYSE: GE ) and Microsoft (Nasdaq: MSFT ) may have roughly three times the number of shares outstanding as Sirius, but it's hard to justify a high share price when you have more shares out there than auto partner Ford (NYSE: F ) or cable giant Comcast (Nasdaq: CMCSA ) .
A reverse stock split is a zero-sum game. It is a desperate move that has often backfired. However, when you factor in the likelihood of even greater dilution if Sirius XM has to recapitalize next year, the glut of shares outstanding is an albatross anchoring the stock to its pocket-change price.
2. The FCC did it in
There is no denying that the FCC is dragging its feet -- taking a year and a half to approve a merger it should have killed or passed last year -- and that this is weighing heavy on the company. It finally allowed the merger to go through, but with little time to get its synergies to simmer ahead of next year's debt-repayment deadlines.
Things would have been materially different if Sirius and XM had been shacking up since last year. 2008 would have been a breakthrough year of operating-cash-flow goodness. Instead, regulators played hard to get, and now the market is pricing Sirius XM as if bankruptcy is inevitable.
For the sake of regulators, they better hope that Sirius XM makes it. With their fingerprints all over this crime scene, it's not just Sirius XM shareholders that will be wiped clean if the company files for bankruptcy reorganization.
3. It's a lousy time for automakers to go weak
If Ford and General Motors (NYSE: GM ) had it bad a month ago, that's nothing compared to today's potholes. Not only are cars not selling, but now Detroit is at the mercy of an unlikely $25 billion bailout to stay afloat through the holidays.
If Sirius XM partners are selling fewer cars, that means fewer drivers being treated to free trials on their satellite radio receivers.
4. The alternatives are real
I've been a Sirius subscriber since 2004. I added XM when it came with my new car in 2006. The aural options were crummy at the time. With little interest in commercial-saddled terrestrial radio and tiring quickly of my CD and iPod music collection, it was either satellite radio or a portable music subscription service like Best Buy's (NYSE: BBY ) Napster.
It's a different playing field these days. I can fire up my iPhone for free Internet radio. The quality is iffy, but audiophiles are rare these days in a world where inferior-to-CD MP3 files and even compressed satellite radio signals will do. GM and Ford have new models with built-in hard drives for uber MP3 storage. Chrysler finally rolled out the UConnect Wi-Fi routers this month, opening up the Web radio option to folks with laptops, iPod touch, and other wireless devices.
Since last month, Sirius XM has actually lowered its subscriber targets. The souring economy and lackluster new car sales are the likely culprits, but it's hard to ignore the evolving line of eardrum magnets.
5. Separating the stock from the sector
Investors need to realize that they are not in the same boat as subscribers. If Sirius does file for bankruptcy next year, it will be for the long-term benefit of its listeners. Common shareholders will get wiped out, but the company will continue to broadcast as it straightens out its balance sheet.
Sirius XM shares are cheap enough to bring out the riverboat gambler in all of us. I am certainly tempted to nibble at these levels. However, it's a pretty big gamble at this point. It's a race of the improving fundamentals against a capsizing balance sheet.
Shares of Sirius XM are unlikely to be at $0.23 at this point next year. They will either be worthless or substantially higher. If you own Sirius XM, it should be the riskiest stock you own. It's a long-shot race ticket. It's a lottery ticket. It's a slot machine.
Yes, a slot machine. One that takes quarters. Get it?
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