With Subscriber Growth, SiriusXM Is a Good Buy On a Pullback

sirius banners

Source: http://www.flickr.com/photos/vsank/

Sirius XM Holdings Inc (NASDAQ:SIRI) is pretty much a household name at this point. For those who are unfamiliar, it provides satellite radio services in the United States and Canada. The company creates and broadcasts commercial-free music, sports talk and live events, comedy, news, exclusive talk and entertainment as well as traffic, weather, data, and information services for subscribers in cars, trucks, RVs, boats, and aircraft. It has various names the services operate under including SiriusXM Traffic, SiriusXM Travel Link, NavTraffic, NavWeather, SiriusXM Aviation, SiriusXM Marine, Sirius Marine Weather, XMWX Aviation, and XMWX Marine.

In addition, the company offers SiriusXM programming through the SiriusXM Internet Radio App for smartphones and other connected devices, as well as online at siriusxm.com. I have been a loyal subscriber, including of the app for the iPhone, for several years. I enjoy the service but recently decided to check back in with the stock as I have not analyzed it since it was trading around $2.50. Now the stock is just under $3.50 a share. In order for the shares to elevate further, the company needs to grow its earnings and revenue. An analysis of the company’s most recent quarter suggests that the stock may have some room to run.

In its most recent quarter SiriusXM saw revenue of $998 million, up 11 percent from the first quarter 2013 revenue of $897 million. Earnings per diluted share were $0.02 in both the first quarter of 2014 and 2013 so there was no year-over-year growth here unfortunately. The company saw net income of $94 million, adjusted for a non-recurring item associated with accounting for its Liberty Media stock repurchase agreement and purchase price accounting adjustments from the Sirius and XM merger, net of taxes, resulted in adjusted net income of $121 million, a 46 percent increase over $83 million in last year’s first quarter. Adjusted EBITDA for the first quarter of 2014 reached a record $335 million, up 28 percent from $262 million in the first quarter of 2013. Further the company’s adjusted EBITDA margin reached a record 33.5 percent in the first quarter of 2014.

Further, the company saw subscribers reach a record 25.8 million. Net subscriber additions in the first quarter of 2014 were 266,799. The total paid subscriber of 25.8 million is up 6 percent from the prior-year period. Self-pay net subscriber additions were 173,480, while the self-pay subscriber base reached a record high of 21.3 million, up 7 percent from the prior-year period. Total paid and unpaid trials were 6.9 million at the end of the first quarter of 2014. This led to free cash flow rising significantly. In fact, free cash flow was $223 million, up 56 percent from $142 million in the first quarter of 2013. Free cash flow per diluted share was 3.6 cents in the first quarter of 2014, up 64 percent from 2.2 cents in the first quarter of 2013. CEO Jim Meyer stated:

SiriusXM performed ahead of our expectations in the first quarter, with 266,799 net subscriber additions including 173,480 self-pay net additions. For the ninth consecutive quarter we grew revenue at a double digit pace, and once again we set a new quarterly record for adjusted EBITDA and adjusted EBITDA margin. Free cash flow grew 56 percent compared to the prior year to a new first quarter record, and we resumed our stock repurchase program, helping to drive free cash flow per share up 64 percent. Our business continues to perform well. New car installations and trial conversions set first quarter records, and our trial funnel stands near an all-time high at 6.9 million. We are excited about this year’s strong growth of subscribers, revenue, adjusted EBITDA, and free cash flow, and we are eager to continue deploying our capital to benefit our stockholders and grow free cash flow per share even faster.

Looking ahead, although the stock has had a serious (pun intended) run-up in the twenty-four months, I think the momentum can continue as the company is taking the right steps for future growth. Furthermore, SiriusXM reaffirmed its previously issued guidance for 2014 which is a plus. It sees net subscriber additions of approximately 1.25 million for the year and expects this to generate revenue of over $4.0 billion. After adjustments it sees EBITDA coming in at approximately $1.38 billion, and sees its free cash flow approaching $1.1 billion. Given these results, but factoring in the lack of real profit growth, I think the stock is a buy, but highly recommend waiting for a pull back to under $3.25.

Disclosure: Christopher F. Davis is a subscriber of SiriusXM but holds no position in SiriusXM stock. He also has no plans to initiate a position in the next 72 hours. He has a buy rating on the partnership and a $4.00 price target.

More From Wall St. Cheat Sheet: