The Stars Are Aligned for Sirius
03/02/2011 10:40 am EST
The satellite radio provider already has big celebrities in its talent stable, but now it’s also profiting from lower costs and the US economic recovery, writes Marc Gerstein in Forbes Low-Priced Stock Report.
Sirius XM Radio (Nasdaq: SIRI), the satellite radio company loaded with big-name content like Howard Stern, Oprah Winfrey, Martha Stewart and a multitude of sports shows, may be the best-known stock in the low-priced universe.
So, if things go well, they’ll likely translate more quickly into vigorous share-price gains.
On the other hand, the stock is apt to trade much the way larger-cap stocks would. For example, even low-priced stocks react to variations between reality and expectation, but Sirius is likely to be more intense in this regard—as was the case when some December quarter numbers turned out to be excellent, but not quite as excellent as some analysts anticipated.
However, I’m willing to tolerate short-term annoyances like that, because the big picture—the one we usually focus on when seeking long-term home run potential—is looking very attractive.
For much of Sirius’ history in the public eye, it was seen as a world-class headline grabber (think Howard Stern, et al, and even the company’s high-profile CEO, Mel Karmazin). But despite the constant press, its ability to survive looked to be in severe jeopardy, due to the tremendous amount of borrowing it had to do just to get off the ground—and then continue to do to pay for the celebrity talent it was accumulating and to offset operating cash losses.
Merger Brings Savings
Sirius also was locked in a battle (and bidding war for content) with another satellite provider, XM. Ultimately, a merger between Sirius and XM, and the passage of time, allowed the combined company (the one we’re looking at now) to be more economically rational in terms of paying to get content and subscribers.
The merger also allowed Sirius XM to reach a point where consumers have come to see satellite radio as a permanent and significant part of the entertainment landscape—subscriber churn, once a problem, is now way down.
Another big plus—huge, actually—is the economic recovery. Most subscribers get satellite via car radios (most being factory installed), so improving demand for autos is now combining with increasing satellite penetration of the vehicle market.
Today, Sirius is past the point where survival is in question. Cash flow is positive; capital needs are down—the satellites are up and orbiting; debt is being reduced; and the company is close to break-even even on a GAAP basis (which reflects various non-cash and capital charges media companies and analysts prefer to ignore.)
The stock rallied to bring the price-to-trailing-12-month-sales ratio to 2.6, versus a broadcast median of around 1.3. The latter figure, however, includes many terrestrial radio and local broadcast firms with very poor growth prospects.
More Growth Ahead
The case for Sirius now turns on its ability to remain a growth story. I think this is a plausible scenario: We’re only now starting to see Sirius do its thing with a strong content lineup (including recent contract renewals from Stern and the NFL) in a growing vehicle market.
The company is not a finished product. It still needs to do more to attract non-vehicular subscribers. Sirius 2.0 (more substantial personalization) and the new generation of equipment that it will involve later in 2011 could provide a boon, as could the growth of Sirius apps for the key mobile platforms.
I disagree with those who see internet-radio provider Pandora, which may stage an IPO, as a serious rival. It has no real content aside from the sort of personalized music channels Yahoo! (Nasdaq: YHOO) has been trying, with little success, to push for years.
Sirius XM Radio (Nasdaq: SIRI) is a long-term buy.
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