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With shares of Sirius XM Radio (NASDAQ:SIRI) now trading at around $2.92, is the satellite radio provider 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 announced better-than-expected revenue growth in the third quarter on Thursday. Average revenue per subscriber rose to $12.14, up from $11.97 in the prior quarter. However, net income missed expectations after falling to $74.5 million, or 1 cent per share, from $104.2 million, or 2 cents per share, a year earlier. The recent third-quarter net profit included a loss on repayment of debt of $107 million. The report was an important one for the company, as it was the last one under current chief executive Mel Karmazin and came just before Liberty Media’s (NASDAQ:LMCA) completes its acquisition plans. Karmazin will step down effective February 1 next year. Liberty chief executive Greg Maffei has already formed a committee with the Sirius board of directors to find a new head for the radio, though Thursday’s report did not offer any details about the search.
Liberty gave Sirius a $530 million loan to avoid bankruptcy in 2009 and has capitalized on the stake it received in return. While Karmazin was not a supporter of the takeover, his scheduled departure and the confirmation of the acquisition has opened the doors for Sirius to focus on the future under new leadership. Liberty chairman John Malone has already spoken of his plans to spin off the radio into an independent company rather than merge it into his own.
E = Equity to Debt Ratio is Close to Zero
Sirius’ debt-to-equity ratio of 0.72 looks promising when you compare its numbers to major competitors. We also need to consider total debt and total cash on hand, which for Sirius is $2.88 billion in debt with $868 million in total cash. Pandora (NYSE:P) has a debt-to-equity ratio of zero with no debt and $82 million in total cash, while Cumulus Media (NASDAQ:CMLS) has a debt-to-equity ratio of 10.04 with $2.8 billion in debt and $19 million in total cash.
T = Technicals on the Stock Chart are Strong
As of October 30, 2012, the stock price is 1.53 percent above its 20Day Simple Moving Average, 7.53 percent above the 50 Day SMA, and 25.11 percent above the 200 Day SMA. Since the beginning of 2012, the stock price has been in an upward trend and is up 54.95 percent year-to-date and up 53.26 percent year over year.
E = Excellent Relative Performance to Peers
Many investors favor Return on Equity as a key metric to how well the company is operating. Sirius’ operational performance is much better than peer companies. Sirius has an ROE of 151.61 percent while rival Pandora comes in way lower at negative 33.41 percent and Cumulus has an ROE of 13.87 percent.
Operating margins are also critical for stock evaluation. Sirius shows up much better with a margin of 23.22 percent compared to negative 9.68 percent for Pandora and 12.29 percent for Cumulus.
T = Trends Support the Industry in which the Company Operates
Music will never really die out as a business, but as with a lot of media, digital is the trend of the time for radio. With Internet radio operators like Pandora and Spotify rapidly gaining listeners rapidly, Sirius will have to focus on a digital-first strategy going into the next few quarters. While data connections remain an obstacle, Internet radio, which is often free at least for limited use, will continue to gain traction.
This is a critical moment for Sirius. With the Liberty takeover certain and a new leadership assuming control, the radio will certainly see operational changes. While Sirius’ financials are fairly healthy, its subscriber base has shot up to more than 20 million, and deals with automakers such as General Motors (NYSE:GM) have helped, the landscape is turning incredibly competitive. Pandora and private companies likes Spotify are strong rivals, but with the possibility of Apple (NASDAQ:AAPL) making an entry into the space, it is a time of reckoning for the radio. Sirius’ long-term future will depend on how it changes with the times, but the stock has returned almost 40 percent over the last few months, and satellite radio is not going away anytime soon.
Sirius looks like it should OUTPERFORM based on the key metrics above.
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