Will it be beautiful music for XM Satellite Radio
Despite the recent resurgence in trading, with the stock up 65% since bottoming out this summer, it's been a laundry list of hits and misses for XM. Then again, even troubled overseas satellite radio provider Worldspace
If momentum is kind, 2007 will shine kindly on the former Rule Breakers newsletter recommendation, but it won't be without its challenges and opportunities.
Challenges to overcome
It's going to be a new year for XM, but many of its past shortcomings are still lurking around. Yes, the company has been able to lick some problems -- like FCC concerns over emission standards on some of the newer portable XM receivers -- but let's see what it is up against in 2007:
- Where do we start? The company will only add about 2 million net subscribers in 2006, after tacking on 2.7 million users in 2005. The company is still citing a long-term goal of 20 million subscribers by 2010, so clearly growth will have to accelerate. That will have to come via factory installations through partners like General Motors
(NYSE:GM) , because both XM and Sirius(NASDAQ:SIRI) have been struggling at the retail level in recent months. - Another dark cloud leftover from 2006: Losses continue to mount.
- The company has been able to restructure its debt to give it a few more years to breathe, but that kind of leverage can only pay off if more money starts coming in than going out. Two outside board members resigned in disgust in 2006, and the chief complaint was spiraling costs. Still, XM is getting better in this department.
- The competition isn't just Sirius or free terrestrial radio. Way too many carmakers are installing iPod jacks in their new models. So Apple
(NASDAQ:AAPL) is a burdensome rival in an auto industry that XM is pointing to as its strongest growth market in the near term.
Opportunities in 2007
What can go right? Plenty.
- New products like the Inno are sweet, but they were hard sells in the 2006 holiday season when consumer electronics superstores were busy selling GPS systems and plasma screens instead. XM will need a hot product in 2007, and that may involve expanding its relationships beyond simply streaming select channels through Alltel
(NYSE:AT) for wireless customers. - Geographically speaking, XM is tied to its domestic reach and chunks of Canada. As an early investor in Worldspace, XM has its fingers in global growth, but the best new markets for XM simply involve cashing in on its content by expanding further into the world of Internet streaming, wireless, and terrestrial syndication. Advertising on its channels that aren't commercial free offers another area for growth. Yes, XM has moved into all of these fronts, but there is ample upside here.
- The stock began to show signs of life in 2006, when the company began to shake up its executive ranks. That may save CEO Hugh Panero's hide in the near term, but a change at the top shouldn't surprise anyone if XM falls back into a rut.
- Finally, we also have the buyout buzz. Sirius has made no bones about its desire to acquire XM, and the combination would help shave operating overhead while giving a combined company the luxury of not bleeding each other's marketing budget dry. There appear to be serious regulatory hurdles, as way too many people see this as a duopoly, but let XM and Sirius cross that bridge when they get there.
Adding it up
Like its satellites, cynics feel that the valuations for both XM and Sirius are out of this world. Neither one is profitable yet, so we can't even approach P/E multiples or even EBITDA-based ones. We do have a top line at XM that we can work with, though.
XM is on track to produce $922 million in revenues this year, and Wall Street is expecting the media giant to generate $1.23 billion in revenues next year. Trading at 4.7 times this year's revenues and 3.5 times next year's sum isn't exactly a bargain when you stack that up to satellite television providers DirecTV
However, XM is in a unique position in that it has proprietary content and reasonable upside in raising rates over the years. Existing features like its traffic and weather premium services, which command a small premium, are simply scratching the surface. It may seem laughable at this point, but in five to seven years, if XM is able to achieve critical mass, this red-inked beast may transform into a healthy margins machine.
XM was a disappointing recommendation in the Rule Breakers growth stock service. Yet there is hope even in its dismissal. It's a loser in a newsletter that is comfortably ahead of the S&P 500 because it takes big swings on companies like XM. Six of the past picks have more than doubled as a result of this growth stock mentality.
So did the newsletter bail too early on XM? The future will tell. There are some near-term problems here. Even Sirius is shedding some shine after it too had to lower its year-end profit target recently. The emphasis on the car market is tricky, because paying $12.95 a month for the service may have been an easy decision for its first 7 million subscribers, but the next 7 million are likely going to be folks who don't commute as much or aren't as avid radio fans as the early pioneers.
Players in the Motley Fool CAPS stock rating service aren't impressed, tagging the stock with CAPS' lowest rating. Yes, even after thumping the market since July, your fellow Fools can be a tough crowd.
So is 2007 going to be bumpy? It sure looks that way. However, there is a big payoff at the end of the road in a few years if XM should happen to find its way there.
Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.
Longtime Fool contributor Rick Munarriz has been a Sirius satellite subscriber since 2004 and an XM subscriber since this spring. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. Alltel is an Income Investor selection. The Fool has adisclosure policy.
