Inside Wall Street: Pick up good vibes from Sirius XM

Satellite radio service provider offers unique consumer value in content and integration.

By Gene Marcial Feb 23, 2012 9:55AM

gehringj/Vetta/Getty ImagesIf you are into radio, you should pick up the good vibes from Sirius XM Radio (SIRI) -- and the promise of its stock.

 

The company provides a quintessential blend of Internet and satellite radio innovation, offering dozens of digital channels of music, news sports, and entertainment targeted and customized to its 21 million subscribers.

 

And Sirius XM's stock has perked up recently. Since dropping to a low $1.45 a share on Oct. 3, 2011, it climbed up to $2.08 by Feb. 22, 2012. Some investment pros see it driving up to $3 a share this year.

 

There aren't many radio services offering what Sirius does and in such a far-reaching way. It provides satellite radio services in the U.S. and Canada, with a programming lineup of 117 channels, including 63 channels of commercial-free music, 54 channels of news, talk, entertainment, traffic, weather and sports.  As an example, Sirius XM will provide nationwide coverage of one of the most popular sports events in the nation: On Sunday, Feb. 26, Sirius XM will air a comprehensive broadcast of the Daytona 500 and NASCAR Speedweeks car-racing event. The event is expected to be large draw for Sirius XM.

 

A recent newcomer that provides some of what Sirius XM offers is Pandora (P), an Internet radio company that lets listeners create up to 100 personalized stations. But it's a smaller company with a market cap of $2 billion on 161 million shares outstanding -- and has yet to make a penny. Moreover, its stock has dropped since it went public last year, from $20 a share to its current price of $12.


Sirius XM, on the other hand, already makes money (7 cents a share in 2011, up from one cent in 2010) and boasts a market value of $8 billion with a much larger number of shares outstanding. And there are a couple of major reasons that can fire up the stock: Initiating share buybacks and paying a dividend.


But on fundamentals alone, Sirius XM already seems like an undervalued stock that will likely become a long-term winner.

 

"Sirius XM continues its progress in the key metrics that matter, including subscriber growth, conversion of trial subscribers to self pay (paying customers), revenue generation, moderating SAC (subscriber-acquisition cost) levels, EBITDA, free-cash generation improvement, and improving financial leverage ratios," says James C. Goss, an analyst at Barrington Research.

 

Interest in the stock, he believes, will increase as management delivers on its financial and operational metrics, to demonstrate that "the substance of the turnaround story is real." Goss rates the stock as "outperform" with a 12-month price target of $3 a share, based on his earnings estimate for 2012 of 8 cents a share on revenues of $3.3 billion.

 

Sirius XM's subscriber count continues to grow. In 2011, it added 1.7 million to raise the total number of subscribers to 21.8 million. For 2012, management's guidance is for an increase of 1.3 million, to a year-end total of 23.2 million. Goss is more optimistic: He predicts a rise of 1.6 million.

 

A big market for Sirius XM's services is the automotive industry. The company offers satellite radios for use in cars, trucks, and boats, as well as homes and offices. It distributes its radios primarily through auto makers, retailers, and websites.

 

Its part of the "differentiated consumer value" that the company offers, says analyst Bryan Kraft of Evercore Partners, is based on a broad and "unique content lineup, seamless integration into the car and ease of use and ubiquitous network coverage."

 

In truth, the auto industry's miraculous recovery should necessarily boost Sirius XM. Auto sales are still at recessionary levels even while the economy continues to improve. So the outlook for 2012 and 2013 will likely improve as the year progresses, predicts Kraft, who also rates the stock as "overweight." For sure, the stock's valuation is modest, given the company's growth outlook, says the analyst.

 

And as undervalued, innovative and growth-oriented as Sirius XM is, the stock could end up as an attractive buyout candidate! Liberty Media in 2008 invested $530 million in Sirius XM in exchange for 12.5 million preferred shares. Some pros believe, rightly or wrongly, that the company is an enticing target, with a large stakeholder as a potential buyer. One other significant detail that's in the mix: Warren Buffett has bought a 2% stake in Liberty Media, which is headed by billionaire activist investor John Malone.




Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

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