TooDarkPark
11-02-2006, 03:30 AM
Long article but it shows that Sirius isn't in as good shape as some people would like you to believe.
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It seems like just yesterday that Howard Stern announced he was leaving terrestrial radio to begin broadcasting his show on commercial-free Sirius Satellite (SIRI - commentary - Cramer's Take). Sirius shares traded up to $8 in December 2005 on the news, but then quickly began a downward trend to their current level around $3.79. But even at this price, are shares worth buying?
At the current price Sirius still has a market capitalization of $5.4 billion, so don't let the low price of the shares fool you. Sirius is still a big company and has one of the largest market caps of stocks in the under $10 universe. Also, the company's debt is more than $1 billion, and analysts do not expect Sirius to make a profit until after 2008.
Over the past few months, Wall Street's main concern has focused on Sirius' subscriber growth. Last year, the company said it expected to have 6.3 million total subscribers by the end of 2006, but given its second- and third-quarter net new subscriber additions, we believe this number may be too optimistic. Shareholders seem to agree, as the stock is trading near its 52-week low.
In August, Sirius announced it had added 600,460 net new subscribers in the second quarter, and in October the company reported 441,000 for the third quarter. Those additions give Sirius 5.1 million total subscribers -- or 1.2 million subscribers short of the 6.3 million forecast. Considering the average number of net additions in the previous two quarters, we believe it will be very difficult for Sirius to pull in as many as 1.2 million net new subscribers -- albeit during the holiday season -- in just three months.
However, Sirius reiterated its guidance on its latest earnings conference call, leading us to believe that heavy discounts in the radio service could be just around the corner. This would increasingly hurt profit margins and could cause further losses down the road.
On a fundamental basis, the company's sales have grown from $67 million in 2004 to $242 million in 2005 and have reached $277 million year to date. However, Sirius' operating expenses are roughly $1 billion annually, and it has not reported a single quarter of operating income or operating cash flow. Given that, investors must size up Sirius' growth prospects going forward -- and they don't look good.
The first hurdle is competition. XM Satellite (XMSR - commentary - Cramer's Take - Rating), Sirius' chief rival, has more total subscriptions, as well as lower costs per subscriber because it uses smaller chips in its radio units. Also, consider that Apple (AAPL - commentary - Cramer's Take - Rating) has stepped into the satellite radio auto market by signing deals with automakers to put iPods into cars. This could further cut into Sirius' subscriber growth going forward.
In addition, Howard Stern's five-year, $500 million deal -- which enkindled so much buzz for Sirius -- no longer looks like the kind of success story that the radio satellite company needs. Stern's ad sales are down, and his celebrity guest bookings are almost nonexistent, and traffic on his Web site is down as well. There have also been rumors in the media that Stern will return to FM radio (while continuing to work on satellite radio), which could cause some Sirius subscribers to defect back to traditional radio.
On the analyst front, the news on Sirius could turn disappointing as well. On average, approximately nine analysts cover each stock in the communications industry vs. 33 analysts for Sirius, according to Thomson First Call. However, we found only one firm with a sell rating on Sirius. This is surprising, especially considering the stock lost 50% of its value in just eight months and is trading at its 52-week low. And if the company fails to meet year-end subscriber estimates, this may open up the door for some downgrades.
One wild card, however, would play in Sirius' favor. Last year, rumors of a possible merger between Sirius and XM surfaced but were quickly squashed by both chief executives, Mel Karmazin at Sirius and Hugh Panero at XM. Even if the two CEOs were in agreement, regulatory issues would have also been a factor, as these companies were the two largest players in the field. But now that Apple has entered the mix, we believe a merger between the pair makes sense. The synergies of the combined company would save money in the long run, which has been a major problem for both Sirius and XM.
However, other than the possibility of a merger, we see no fundamental reason to own Sirius shares. Even at the current price, the risk/reward is high, based on the competitive threats confronting the company, Sirius' higher expenses than its rivals, and the fact that the company will not see profits most likely until at least 2009. Unless Sirius can somehow beat its 2006 subscriber estimate of 6.3 million subscribers, we believe shares could fall below $3 going into 2007.
___________________________
It seems like just yesterday that Howard Stern announced he was leaving terrestrial radio to begin broadcasting his show on commercial-free Sirius Satellite (SIRI - commentary - Cramer's Take). Sirius shares traded up to $8 in December 2005 on the news, but then quickly began a downward trend to their current level around $3.79. But even at this price, are shares worth buying?
At the current price Sirius still has a market capitalization of $5.4 billion, so don't let the low price of the shares fool you. Sirius is still a big company and has one of the largest market caps of stocks in the under $10 universe. Also, the company's debt is more than $1 billion, and analysts do not expect Sirius to make a profit until after 2008.
Over the past few months, Wall Street's main concern has focused on Sirius' subscriber growth. Last year, the company said it expected to have 6.3 million total subscribers by the end of 2006, but given its second- and third-quarter net new subscriber additions, we believe this number may be too optimistic. Shareholders seem to agree, as the stock is trading near its 52-week low.
In August, Sirius announced it had added 600,460 net new subscribers in the second quarter, and in October the company reported 441,000 for the third quarter. Those additions give Sirius 5.1 million total subscribers -- or 1.2 million subscribers short of the 6.3 million forecast. Considering the average number of net additions in the previous two quarters, we believe it will be very difficult for Sirius to pull in as many as 1.2 million net new subscribers -- albeit during the holiday season -- in just three months.
However, Sirius reiterated its guidance on its latest earnings conference call, leading us to believe that heavy discounts in the radio service could be just around the corner. This would increasingly hurt profit margins and could cause further losses down the road.
On a fundamental basis, the company's sales have grown from $67 million in 2004 to $242 million in 2005 and have reached $277 million year to date. However, Sirius' operating expenses are roughly $1 billion annually, and it has not reported a single quarter of operating income or operating cash flow. Given that, investors must size up Sirius' growth prospects going forward -- and they don't look good.
The first hurdle is competition. XM Satellite (XMSR - commentary - Cramer's Take - Rating), Sirius' chief rival, has more total subscriptions, as well as lower costs per subscriber because it uses smaller chips in its radio units. Also, consider that Apple (AAPL - commentary - Cramer's Take - Rating) has stepped into the satellite radio auto market by signing deals with automakers to put iPods into cars. This could further cut into Sirius' subscriber growth going forward.
In addition, Howard Stern's five-year, $500 million deal -- which enkindled so much buzz for Sirius -- no longer looks like the kind of success story that the radio satellite company needs. Stern's ad sales are down, and his celebrity guest bookings are almost nonexistent, and traffic on his Web site is down as well. There have also been rumors in the media that Stern will return to FM radio (while continuing to work on satellite radio), which could cause some Sirius subscribers to defect back to traditional radio.
On the analyst front, the news on Sirius could turn disappointing as well. On average, approximately nine analysts cover each stock in the communications industry vs. 33 analysts for Sirius, according to Thomson First Call. However, we found only one firm with a sell rating on Sirius. This is surprising, especially considering the stock lost 50% of its value in just eight months and is trading at its 52-week low. And if the company fails to meet year-end subscriber estimates, this may open up the door for some downgrades.
One wild card, however, would play in Sirius' favor. Last year, rumors of a possible merger between Sirius and XM surfaced but were quickly squashed by both chief executives, Mel Karmazin at Sirius and Hugh Panero at XM. Even if the two CEOs were in agreement, regulatory issues would have also been a factor, as these companies were the two largest players in the field. But now that Apple has entered the mix, we believe a merger between the pair makes sense. The synergies of the combined company would save money in the long run, which has been a major problem for both Sirius and XM.
However, other than the possibility of a merger, we see no fundamental reason to own Sirius shares. Even at the current price, the risk/reward is high, based on the competitive threats confronting the company, Sirius' higher expenses than its rivals, and the fact that the company will not see profits most likely until at least 2009. Unless Sirius can somehow beat its 2006 subscriber estimate of 6.3 million subscribers, we believe shares could fall below $3 going into 2007.