Is SIRIUS XM Radio’s Stock a Worthwhile Risk?

With shares of SIRIUS XM RADIO (NASDAQ:SIRI) trading at around $2.74, is SIRI a Buy, a Wait and See, or a Stay Away? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

SIRIUS XM Radio is the ultimate American comeback story. Americans love comebacks, and this company certainly fits the bill. SIRIUS XM Radio was headed for potential bankruptcy, or at least seriously rumored to be headed for bankruptcy, on three different occasions including 2001, 2003, and 2008. (Of course, it was SIRIUS Satellite Radio for the majority of that time.) Regardless of the name, SIRIUS XM Radio has a never-say-die attitude. Some companies believe so much in what they’re offering that they will fight tooth and nail to get to the promise land. These are the companies that almost always exceed expectations, and by wide margins.

There are several catalysts for the recent surge in the stock price. One is a lot of interest from large institutions, including Vanguard Group, Blackrock Institutional Trust, and Invesco. Another catalyst has been the expectation of a new CEO. This can act as a positive or negative, but it’s more likely to be a positive since the management at SIRIUS is wise with their decision making. A third catalyst is SIRIUS plans to buy back shares in the near future.

E = Debt to Equity Ratio is Normal

SIRIUS XM Radio has a debt-to-equity ratio of .58, which is low for the industry, especially compared to one of its biggest competitors, Cumulus Media (NASDAQ:CMLS). Cumulus Media has a debt-to-equity ratio of 8.10.

SIRIUS XM Radio has $556 million in cash and $2.34 billion in debt. That’s subpar, but this company is used to working under strenuous conditions. They also have plenty of operating cash flow. If these numbers still make you nervous, compare them to Cumulus Media which has $50.23 million in cash and $2.69 billion in debt…

T = Technicals on the Stock Chart Are Strong

SIRIUS XM Radio has underperformed the S&P 500 over the past month, but that shouldn’t be a concern. Over the past month, SIRIUS XM Radio is down 3.55% while the S&P 500 is down only .15%. Year-to-date, SIRIUS XM Radio is up 49.45% while the S&P 500 is up 14.09%. Over the past calendar year, SIRIUS XM Radio is up 55.43% while the S&P 500 is up 24.12%. When you look at three-year returns, SIRIUS XM Radio is up an enormous 331.7% while the S&P 500 is up only 34.85%.

SIRIUS XM Radio is currently trading a tad lower than its 50-day SMA of $2.71. It’s trading higher than its 100-day SMA of $2.51. In addition to that, it’s trading higher than its 200-day moving average of $2.31.

Despite a subpar month, SIRIUS XM Radio has consistently trended up for three years. While there will be bumps in the road, this trend should continue.

E = Earnings Are Steady and Revenue Is Impressive

If you believe in growth above all other factors, then you will be very impressed with the year-over-year numbers below:

2007 2008 2009 2010 2011
Revenue ($) in billions 922.07M 1.664 2.473 2.817 3.015
Diluted EPS ($) -0.39 -2.45 -0.15 0.01 0.07

The quarterly numbers are just as impressive in a relative sense:

9/30/2011 12/31/2011 3/31/2012 6/30/2012 9/30/2012
Revenue ($) in millions 762.55 783.74 804.72 837.54 867.36
Diluted EPS ($) 0.02 0.01 0.02 0.48 0.01

T = Trends Might Support the Industry

It’s difficult to side one way or another here, hence the word ‘Might.’ Satellite radio is undoubtedly a consumer discretionary item. In this economic environment, it’s difficult to say there is a trend for discretionary items. Ironically, discretionary items have performed well despite the weak macro backdrop.

The big debate is whether satellite radio will become the next Cable TV where almost everyone feels the need to own it. While we don’t see every car with a satellite antenna, that could be a positive because there’s evidence of an untapped market. The annual revenue growth above also indicates SIRIUS XM Radio is moving in the right direction.

Another wildcard is there are many old cars being driven in America today. If people go out and buy new cars then we could see a significant boost in SIRIUS XM Radio sales. On the other hand, based on current economic conditions people may choose to continuously put money into their existing cars or buy a used car (go to the next page for my conclusion)

Conclusion

You won’t find many stocks under $5 that give you so many reasons to believe in the future. Will there be tough times? Of course. This is far from the late ‘90s when investors were complaining about 30% gains. It’s also important to point out that the Short % of the Float is 8.10%. Therefore, someone doesn’t believe in this story. However, large short positions are common for stocks under $5, and this shouldn’t be a concern.

If you own SIRIUS XM Radio at the current time, it’s a WAIT AND SEE. If you’re looking to get in for the long haul, then it’s an OUTPERFORM. If SIRIUS XM Radio meets its potential, then $2.70, $2.50, or $2.90 won’t mean anything. The stock price will be much higher in a few years. However, if you’re thinking short-term, it would be wise to wait for a pullback.

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.

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