Is Sirius XM Facing Too Many Headwinds?

With shares of Sirius XM Radio Inc. (NASDAQ:SIRI) trading at around $3.05, is SIRI an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

On the bright side, Sirius won its legal battle versus Howard Stern, which saved the company $300 million. On the other hand, there are many headwinds for Sirius at the moment. For one, Sirius has forecasted weaker net subscriber growth for 2013. There is only one possible way this is positive news, which is if it’s a matter of sandbagging, which Sirius has been known for in the past. A second big headwind is increased competition, especially from the likes of Pandora Media Inc. (NYSE:P). A third big headwind is the continuous high costs for recruiting new subscribers.

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On the positive side, revenue and EPS have shown consistent improvements over the past several years and margins remain impressive.

Now let’s get to some numbers. The chart below compares fundamentals for Sirius, Pandora, and Cumulus Media Inc. (NASDAQ:CMLS). Sirius has a market cap of $20.00 billion, Pandora has a market cap of $2.31 billion, and Cumulus has a market cap of $551.25 million.

SIRI

P

CMLS

Trailing   P/E

5.97

N/A

N/A

Forward   P/E

23.46

66.70

10.13

Profit   Margin

102.08%

-8.93%

-3.04%

ROE

146.41%

-37.49%

-25.51%

Operating   Cash Flow

$806.77 Million

-$250.00 Thousand

 $179.49 Million

Dividend   Yield

N/A

N/A

N/A

Short   Position

10.60%

N/A

N/A

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Strong  

The debt-to-equity ratio for Sirius is much stronger than the industry average of 4.20.

Debt-To-Equity

Cash

Long-Term Debt

SIRI

0.60

$520.95 Million

$2.44 Billion

P

N/A

$88..97 Million

$0

CMLS

8.48

$88.05 Million

$2.70 Billion

 

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T = Technicals Are Mixed  

Sirius has performed extremely well over a three-year time frame, but that momentum has slowed since the beginning of the year.

1 Month

Year-To-Date

1 Year

3 Year

SIRI

-1.93%

5.54%

43.14%

187.60%

P

-4.57%

46.57%

62.70%

2.32%

CMLS

-5.12%

17.98%

-3.96%

-36.62%

 

At $3.05, Sirius is trading below its 50-day SMA, but above its 100-day SMA and 200-day SMA.

50-Day   SMA

3.12

100-Day   SMA

3.04

200-Day   SMA

2.75

 

E = Earnings Have Been Improving                

Revenue and earnings have consistently improved on an annual basis.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

1.66

2.47

2.82

3.02

3.40

Diluted   EPS ($)

-2.45

-0.15

0.01

0.07

0.51

 

When we look at the last quarter on a year-over-year basis, we see a significant improvement in revenue, and a slight decline in earnings.

12/2011

3/2012

6/2012

9/2012

12/2013

Revenue   ($)in   millions

783.74

804.72

837.54

867.36

892.42

Diluted   EPS ($)

0.01

0.02

0.48

0.01

0.00

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

It’s not really a matter of whether or not trends support the industry. It’s about which companies will survive in the industry. In the long run, there won’t be enough room for Sirius, Pandora, and Spotify. The consumer is too weak for all three companies to succeed. A lot will depend on marketing, but marketing increases costs. Therefore, it’s a tricky situation in this economic environment. Every penny saved means something, yet it’s difficult to grow without spending a lot of money on marketing. This would make it seem as though it’s a gambling-type atmosphere, a matter of whichever company bets the biggest on marketing and hits wins. But that’s not the case. It’s more about marketing in intelligent, creative, and cost-saving ways. Whichever company can figure this out will eventually be the victor.

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Conclusion

Sirius has a lot of potential, but that’s been the case for how many years now? It’s understood that the stock has appreciated significantly over the past several years, but so have most stocks. And though the stock’s move has been impressive, it always seems as though something is lacking. That true compounding, long-term breakout move never happens. The stock might be up over 187 percent over the past three years, but it came from the depths of hell, which made that type of move easier.

Looking ahead, the stock’s potential has decreased considering the increased competition (more affordable options) and status of the global economy. If the economy falters and the consumer continues to weaken, then Sirius would have a very difficult time because the auto market would suffer. The expected decline in net new subscribers is also a big negative if there is no sandbagging involved.

Overall, risks outweigh potential rewards. Sirius is a STAY AWAY. However, this story is worth revisiting in a month or two as this industry tends to change at a rapid rate.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I am currently short technology, financials, the Russell 2000, and the euro.

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