Approaching a company from all sides is a great way to analyze the floor and the ceiling of its potential as an investment. We can do this through SWOT analysis, a look at a company's strengths, weaknesses, opportunities, and threats. Today I'd like to focus on Sirius XM Radio
Strengths:
- After years of meandering through red ink and tacking on billions in accumulated deficits, Sirius XM has delivered three consecutive quarters of breakeven results. Analysts expect the meager profitability to continue.
- Sirius XM reports 1.1 million net subscriber additions over the past year, and it has already revised its guidance for 2010 year-end subscribers twice. The satellite radio giant now expects to close out the year with 19.9 million subscribers. In the realm of subscriber-based entertainment, only DirecTV
(NYSE: DTV) and Comcast(Nasdaq: CMCSA) command larger crowds. - Miraculously pulling off the successful merger between Sirius and XM, the company is the only game in town when it comes to satellite radio. There is really no other premium radio offering available.
Weaknesses:
- Sirius XM has put on more than a little weight when it comes to its shares outstanding. Eight summers ago, Sirius had just 76.7 million shares to lug around. A recapitalization, swapping debt for low-priced shares, the combination with XM, and handing Liberty Capital
(Nasdaq: LCAPA) a 40% preferred share stake last year finds Sirius XM with more than 6.3 billion shares outstanding -- and counting. Profitability is here, but it has to be divided by an awful lot of shares. - Retail sales have been dwindling in recent years. Factory-installed receivers in new cars have more than made up for the retail-level shortcoming, but it would be nice to have some aftermarket juice to lean on the next time the automakers run dry.
- Despite deep overhead slashing to take advantage of the merger synergies, Sirius XM continues to generate thin profit margins.
Opportunities:
- Billions in accumulated deficits never look good on a resume, but Sirius XM is in the enviable position of having billions in tax loss carryforwards to offset future liabilities. This is huge now that Sirius XM is profitable. It also gives the company unusual leverage if it should seek acquisitions of profitable companies, since pre-tax earnings are that much more valuable when they can largely trickle to the bottom line.
- Since rolling out its streaming app through Apple's
(Nasdaq: AAPL) App Store, Sirius XM has embraced all of the leading smartphone platforms. Digital delivery is competitive, particularly for a premium service going up against freebies, but it provides an incremental platform and may one day open the door for international offerings given its established brand. - Margins have been weak in the past, but they don't have to always be. Unlike cable and satellite television providers, Sirius XM has more freedom in its content offerings. It has greater control in its programming costs, and that includes proprietary channels and self-directed music stations.
Threats:
- How real is the threat of Pandora and its Web-streaming cronies? Internet radio and music discovery sites are unlikely to match Sirius XM's bankrolled programming, but it's true that a greater number of smartphones in the marketplace makes it that much easier to have a radio choice beyond terrestrial and satellite. AT&T's
(NYSE: T) move this summer to cap unlimited plans may help Sirius XM, but the choices are growing for more and more consumers. - Liberty's John Malone made the shrewd media investment of 2009 when his company acquired a preferred share stake that is now worth more than $2 billion in exchange for lending Sirius XM $580 million. Malone loves to shuffle his properties around, and a cash crunch could force him into considering unloading some of his stake. A stock with an already bloated share count would have a thickening float if that were to happen.
- Howard Stern has a little more than five months left before his five-year contract with Sirius runs out. Renewing Stern's deal appears to be the goal, but what if Stern retires, bolts, or decides to dramatically scale back his live show obligations? Sirius XM's subscriber ranks would be tested, especially if he left for a rival platform.
Share your thoughts in the comments box below on Sirius XM's strengths, weaknesses, opportunities, and threats. What did I miss?
