Sunday, February 13, 2011

Sirius XM - A Lot Riding on Next Week's Earnings

Next Tuesday Sirius XM (SIRI) will be announcing fourth quarter and annual earnings for 2010 and there is a slight chance that the company will announce a positive year for the first time in a long time. In 2006, SIRI lost 79 cents a share, but this amount has been diminishing ever since. Despite the improving earnings, it was not until the second half of 2008 when the stock price plummeted, for obvious external economic reasons. Of course, since then we have seen a recovery, corresponding with their improving earnings, culminating in the run from $1.00 to $1.79 in the last 5 months.

With 135 channels there really is something for every Sirius XM listener, whether it be sports, talk radio, business, comedy, or basically any kind of music you could want to listen to. Their licensing with the major sports leagues and their ability keep huge names on board set them apart from terrestrial radio.

Recent opinion has suggested that this company is overvalued price wise (link) or knock the company for past wrongs (link). However, this stock must be taken for what it is, and people need to realize that future earnings will be much better than the last five years. I shall explain this proclamation, but first, a quip. While writing this, listening to my iTouch (AAPL) on shuffle, Rage Against the Machine offered a very fitting line for this analysis in Guerrilla Radio:

Was is cast for the mass who burn and toil?
Or for the vultures who thirst for blood and oil?
Yes, a spectacle, monopolized.

It was 2007 when Sirius and XM announced their merger, therein by monopolizing the satellite radio industry. Some argue that they have legitimate competitors, such as Pandora, but in reality Pandora is no threat to the auto subscriber base. Of course there is internet radio, and those like me that swear by their iPod docks, but truth be told, Sirius offers a highly unique product with a bright future.

Their hold on the market is very similar to Netflix (NFLX) in that, as stated, once you try you won’t want to let it go and there are few if any bona fide competitors. So the biggest thing is for Sirius to optimize its margins. This does cap the potential market, since there are only so many people driving in the world and you can only charge so much for this product, but they can certainly be profitable for years to come.

Sirius does boast that their service can be used on a computer, in your home, or on your mobile smart-phone, but we all know that the backbone of their revenue comes from in-car units. They claim to have over 20 million subscribers, and the majority of these units are in vehicles. It is also well known that the company benefits much more from renewed subscriptions, rather than new users, because of the cost of the receiver. But, speaking from experience a new user is very likely to fall into the former category after their initial membership expires.

With this in mind, consider the following report from the National Automobile Dealers Association, which offered some very positive guidance last weekend. They predict new vehicle sales of just under 13 million for 2011 which would be significantly hirer than last year. They base this on the improving economic conditions, an apparent shortage of used cars, and consumer credit, among other things. They also believe that rising gas prices will encourage consumers to trade in for more fuel efficient vehicles.

This is good news for SIRI holders, because more new car sales equals more subscriptions. So the question becomes how much will this affect the stock price and what is going to happen to it in the near future. Consider the 1 year chart below.

You can see that for 3 or 4 months the stock was trading in a tight range in and around $1.00. Actually, looking back, there is probably a tenant formation from May to September which caused the breakout that ultimately resulted in this upward trend. Based on the prior analysis, one should argue that this stock is certainly not overvalued, as investors are paying for future prosperity. Things are looking good at Sirius and there is no reason why Sirius could not be turning a profit for years to come; people having realized this have helped to drive the stock up.


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