Buy Sirius XM on the Sell-Off

Sirius trades at cheap valuations and investors will see benefits from the drop in the company's stock price. Sirius XM has reopened a substantial share repurchase plan as well, which will drive upside.

Ishfaque Faruk
Ishfaque Faruk
Apr 2, 2014 at 7:00AM
Consumer Goods

After the merger with Liberty Media (NASDAQ:FWONA) fell through, shares of Sirius XM (NASDAQ:SIRI) have dropped heavily. In addition to that, speculation about Apple (NASDAQ:AAPL) gaining a much stronger footprint in the auto-entertainment market has contributed to the sell-off of Sirius' stock.

Sirius remains a great business with strong subscriber growth, free cash flow, and revenue, and the company has resumed its share buyback program. The pullback in Sirius shares makes an investment in the satellite radio maker very attractive for long-term investors.

Robust car sales
Sirius XM's business model depends heavily upon new car sales and, to a lesser extent, the used-car market. The company's satellite receivers are installed in new cars -- a customer gets a promotional free trial, and then the customer either becomes a self-pay subscriber after the trial ends or cancels the subscription. This funnel works much better with healthy levels of new car sales.

Automobile research firm Edmunds expects light vehicle sales to cross the pre-recession level of 16 million. The firm projects car sales of 16.4 million in 2014, driven by a stronger economy. With capital markets near all-time highs, the forecast will probably not heavily miss the mark. 

Strong fundamentals
Sirius's fundamentals are well in place and this will help the company hit its subscriber, revenue, and free cash flow targets for 2014. The company's subscriber count should increase by 1.25 million according to management's guidance for 2014. The company will also restart its share buyback program, with the Liberty Media bid off the table. 

Sirius' share repurchase authorization of $2.2 billion represents 11% of the company's market capitalization. As the company's stock price took a nose-dive in the last few weeks, long-term shareholders will receive rewards because the company will buy back stock at a cheaper price. 

John Malone controls Sirius's controlling shareholder Liberty Media. John Malone has always favored leveraged share repurchases, which involve adding debt to a company's balance sheet. Once the company uses up its current buyback program, the company will likely extend its share repurchase program because it has a strong margin profile and free cash flow generation capabilities.

The average revenue per user, or ARPU, has even seen small but notable increases as well. In the last quarter, Sirius's ARPU stood at $12.46 for a sequential increase from the prior quarter when its ARPU stood at $12.29. Growing ARPU is a very important metric for companies with subscription-based business models, and Sirius is definitely moving in the right direction. 

However, in the holiday quarter a large OEM (speculation said General Motors) changed the way that it promoted Sirius XM subscriptions. As a result, the paid-promotional subscriber count of Sirius XM declined by 434,000 and the churn rate increased to 1.9%. However, the company's more important self-pay subscriber count is on the rise, and it should continue to increase going forward. 

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Competitive threats appear overblown
The speculation about Apple's iTunes Radio becoming a major player in the car-entertainment market largely looks like mere speculation. Reports state that National Public Radio, or NPR, which users can get on the web and through mobile apps for free, will become the first radio station on iTunes Radio. 

It's worth noting that iTunes Radio mostly includes music and came about as Apple's answer to the free Internet radio service Pandora. Apple cannibalized its own iTunes download sales with its launch of the free ad-supported iTunes Radio. In addition, Pandora has reported a decline in listener hours after the launch of iTunes Radio. Apple is a much more formidable competitor for Pandora than it is for Sirius XM.

Sirius XM has highly differentiated content and it has more than 150 channels which include exclusive deals from very popular channels like Howard Stern, NASCAR Race, MLB, etc. As a result, even if Apple launches a NPR radio station, which listeners can already get for free, it will not have much impact on Sirius XM's business. Listeners can also hear ad-supported media for free already. The value propositions of the two companies differ vastly. 

The bottom line
The number of cars with Sirius XM subscription trials stood at 13 million in 2013, and the company expects to ramp that up to 15 million in 2014. The company gave rather conservative subscriber guidance for 2014, going by this increase in trial subscriptions. 

Sirius XM has also taken steps to reduce its dependency on subscription revenue, which made up 87% of total sales for the company in 2013. The company's telematics services business should generate $100 million in revenue in 2014.  The company has big upside due to the numerous drivers in place, and long-term investors will benefit from the share repurchases as well. The dip in the company's stock price offers a very compelling buying opportunity.