Satellite Radio Could Bounce Back

09/10/2012 11:15 am EST


Marc Gerstein

Editor, Forbes Low-Priced Stock Report

As more and more streaming music sites keep hitting the Internet, it pays to look back and satellite radio, because it has been generating revenue and has reworked its business plan for the new environment, notes Marc Gerstein of Forbes Low-Priced Stock Report.

Sirius XM Radio (SIRI) was first featured in the newsletter in February 2011, and has done pretty well. As of mid-August, SIRI was up 38%, versus an overall 2.5% decline for the Russell 2000.

It's being featured again, first because it is worthwhile in general to refresh our analysis, and second because this stock-unlike most in our universe-is so heavily followed it can be hard for investors to cut through the exorbitant level of clutter and focus on substance.

Obviously, as has been the case from Day 1, we have to contemplate the prospect that someday superstar shock-jock Howard Stern will leave Sirius, although we have no idea when that will happen. It will hit revenues, but it will also take a big chunk out of cost.

I think Sirius is a very valuable service beyond Stern (to whom I listen much less frequently than when I first subscribed), but if you are worried, then make things easy and take profits now. Beyond that, there are three key issues:

  • cash generation
  • auto installations
  • service evolution

At one time, cash generation was a matter of corporate life or death. There's still lots of debt, but SIRI generates plenty of cash flow, enough to be gradually reducing its borrowings.

Meanwhile, the interest coverage ratio in the past 12 months has been a comfortable 4.5. When all is said and done, leverage (the relationship between variable operating profit and more-or-less fixed interest expense) could be a big plus going forward, as modest gains in the former produce disproportionately large gains in net income, enough potentially to justify the stock's currently high growth-oriented valuation metrics.

With auto installations still vital to SIRI, it would obviously be nice if new car production were better, a phenomenon that will require a generally stronger economy, although the aging of the vehicle fleet might help a bit even if the economy remains sub-optimal.

But at least SIRI continues to do as well as can be expected given the environment it faces. In 2011, it was in 67% of new vehicles, up from 46% in 2008. And it's now penetrating the pre-owned vehicle market.

Users start out with promotional pricing; the conversion rate has remained steady at about 45%, and beyond that churn has-despite an early-2012 price increase-remained very low (1.9%). This indicates that once customers decide to stick with SIRI, they don't typically change their minds. Better auto production still lies ahead as a potential earnings-growth catalyst.

Finally, we turn to the service itself. It definitely needs to evolve, because there is competition, not just from terrestrial radio but from various forms of Internet radio (Pandora, et al) that boast considerable personalization prowess. It's hard for Internet radio to compete in the car, but as public WiFi spreads, that should change.

As to personalization, however, it definitely is valuable-but be careful about going overboard. Being a program director, a good one, is hard work, even if you're doing it for yourself.

And speaking for myself, there's something to be said for sitting back as audience and enjoying music selections chosen by humans who are expert in genres I like that it would never have occurred to me to choose directly or indirectly (through direct selections that interact with similar-to personalization algorithms).

Even so, SIRI listeners who want some personalization no longer have to do without. Users can now receive alerts when favorite shows air, pause, rewind, and skip ahead, come in late and still choose to hear a particular show from the beginning, or pick any point up to five hours back for listening. Also, SIRI just introduced on-demand episodes for shows from its vault (generally recent shows).

Copyright rules being what they are, perfect personalization is possible only with one's own MP3 player. But as to radio, the SIRI offering looks quite strong. Sirius XM Radio remains a Buy.

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