No stock or company is perfect.
I may be generally bullish when it comes to Sirius XM Radio
Come tomorrow, I'll be back with the five reasons to buy Sirius XM. But today I'm digging into the five biggest hurdles that the media provider needs to clear.
1. Car sales are slowing down
After several months of heady year-over-year growth, the industry is braced for a slowdown. This is about more than just the sequential decline in June relative to May. We're now bumping up against last year's Cash for Clunkers campaign that triggered the industry's revival.
"Since the third quarter of '09, the industry has flat-lined," Ford
Car sales remain Sirius XM's best source for new subscribers. Most cars these days come with factory-installed satellite radio receivers, and roughly half of the buyers stick with Sirius or XM after their trial offers run out. Any material slowdown there will create a deep imprint on Sirius XM's rolls.
2. Retail sales remain sluggish
Despite its success in the showroom, Sirius XM has been a real dud in the aftermarket. It shed 0.3 million net retail subscribers in 2008 and a whopping 1.2 million last year. Sirius XM closed out this year's freshman quarter with 305,547 fewer retail users than when it started.
There's a good reasons for this -- and a bad one.
The positive spin is that third-party auto installations are no longer necessary as more automakers equip their cars with factory-installed receivers. Used cars with older receivers are also starting to circulate into the marketplace.
The negative spin is that retail sales also reflect the portable and home-based systems that just don't seem to be selling the way they used to. Spotty home reception issues and a plethora of smartphones with convenient access to free Web-based streams aren't helping.
Investors have shrugged off the retail weakness because the automakers have been there to save the days. We're about to hit a rough patch there.
3. Malone madness
John Malone is shuffling the cards of his hydra-headed Liberty Media empire, and the makeover may not be good for Liberty Capital
Some have speculated that Malone may want to acquire the 60% of Sirius XM that he does not own, but how likely is that? Malone runs a leveraged ship and Moody's recently downgraded the debt rating on one of his Liberty units.
Is it really logical to believe that Malone would fork over at least $4 billion for the stake he doesn't own and inherit roughly $3 billion in debt? Wouldn't it be easier to raise cash by unloading his position that is worth nearly $3 billion?
4. Smartphones keep getting smarter
Mobile connectivity is more of a threat than an opportunity for Sirius XM. Sure, the satrad star has spent the past year debuting applications for all three major smartphone platforms, but CEO Mel Karmazin hasn't divulged how effective the apps have been in smoking out new accounts. There was some initial chest-thumping when Sirius XM's first program debuted in Apple's
Instead, wireless customers with chunky data plans are tempted to make the most of their 3G and 4G connectivity. Automakers have been updating their dashboards to make the most of smartphone access to Web streams, podcasts, and music discovery sites.
Sierra Wireless
Smartphones are also getting into the game. Sprint's
In short, portable connectivity has played a part in satellite radio's shortcomings at the retail level. Now it's invading the automotive fortress.
5. Valuation concerns
Neophyte investors who assume that Sirius XM shares are cheap because they trade for about a buck may not realize that this is a company with billions of shares outstanding. Tack on the company's net debt to the value of its common stock and Liberty's preferred stake and you arrive at an enterprise value that is roughly $9 billion.
Is Sirius XM worth more or less than $9 billion?
Well, let's go to the tape. Revenue is projected to clock in at $2.8 billion this year, growing 7% to $3.0 billion come 2011. Sirius XM is now profitable. Analysts see breakeven results in 2010, and a profit of $0.02 a share next year.
A year-ahead earnings multiple of nearly 50 isn't cheap. Sirius XM's revenue multiple is kinder, but still lofty considering the company's historically weak margins.
But are margins about to get a boost? Are there catalysts out there to drive Sirius XM's top line higher? I'm getting ahead of myself. That's fodder for my "5 Reasons to Buy Sirius XM" column. It's coming tomorrow.
Is Sirius XM undervalued or overvalued? Share your thoughts in the comments box below.
