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4 Reasons a Sirius XM Bear Should Worry

By Rick Munarriz - Apr 8, 2013 at 6:00PM

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An untimely downgrade raises some points that are easy enough to counter.

Sirius XM Radio (SIRI 1.14%) saw its shares trading below $3 for the first time since February last week, but not everybody thinks this is a buying opportunity. Zacks Equity Research knocked down the stock to "underperform" on Thursday.

There are a few reasons for the downgrade.

  • Sirius XM's 2013 outlook calling for 1.4 million net additions -- and a more encouraging 1.6 million self-pay subscriber additions -- is short of the 2 million net additions and 1.66 million self-pay accounts it tacked on last year.
  • The stock has run up too high -- up 73% over the past year at the time of the downgrade.
  • Sirius XM already has a commanding presence in the U.S. auto market, now facing "growing competition from Pandora (P) and Spotfy."
  • Management policy may be uncertain after Sirius XM "lost the legal battle" as Liberty Media (FWONA) took majority control of the satellite-radio provider.

Those points add up to a reasonable bearish thesis on the surface, but dig deeper, and they all appear to be flawed.

Bulls fight back
Sirius XM's guidance was modest back in January, but keep in mind that Sirius XM was targeting only 1.3 million net subscriber additions for 2012 a year earlier. As the economy firmed up, retention trends improved, and auto sales remained resilient, the media giant jacked up its guidance to 1.5 million, 1.6 million, and 1.8 million, before ultimately arriving at 2 million net additions for all of last year. Downgrading the stock based on its outlook should be done with respect to Sirius XM's recent history of being overly conservative on that front.

As for the stock's rally, has anyone seen Sirius XM's stock run in recent years? Investors bailing on Sirius XM after the stock's 400% surge in 2009 would've missed out on a further 172% pop in 2010. Dumping Sirius XM just because it has had a strong run and is near a fresh 52-week high has been the wrong move in recent years.

When it comes to Sirius XM's presence in the auto market, keep in mind that there are a lot of old cars out there without satellite-radio receivers. As those autos get traded in, there's a good chance that the new car will have a Sirius or XM receiver. There are more than 250 million registered passenger vehicles in this country, and Sirius XM is currently servicing less than 10% of them. There's upside to be had here.

There's also no empirical evidence to suggest that Pandora's booming popularity has hurt Sirius XM. Conversion rates continue to hold within the historical norm of 44% to 46%. The monthly churn rate is currently below the 2% average. In other words, the wider adoption of smarpthones and Bluetooth-enabled cars hasn't held Sirius XM back. If anything, it may be helping. CFO David Frear surprised investors last month by pointing out that buyers of high-tech cars are converting at higher rates than are owners of other vehicles.

Finally, the Liberty Media tussle was never much of a fight. Liberty Media received 40% of the company for providing a necessary financial lifeline four years ago, and it made its intentions clear for some time about raising its stake to just over 50% to gain control of the company. Liberty Media now has that majority stake, and that makes it less likely to do something stupid that would sink its investment.

There may very well be a solid bear case to be made against Sirius XM, but these four points are either dated or invalid.


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Stocks Mentioned

Sirius XM Holdings Inc. Stock Quote
Sirius XM Holdings Inc.
$6.23 (1.14%) $0.07
Pandora Media, Inc. Stock Quote
Pandora Media, Inc.
Liberty Media Corporation Stock Quote
Liberty Media Corporation

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