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Sirius XM: Surviving, But Overvalued


Sirius XM reported disappointing subscriber numbers, and the stock appears overvalued.

Satellite-radio giant Sirius XM (SIRI) reported third-quarter earnings this morning, with a disappointing subscriber number sending the stock down in early trade.

Let's take a look at the headline facts and figures:
  • Revenues rose 6% year-over-year to hit $763 million, which was fractionally below analysts' expectations
  • Earnings came in at $0.01 a share, beating consensus by a penny
  • Full-year 2011 revenue guidance remains at $3 billion, which is just slightly below consensus
  • 2012 guidance was also reaffirmed at $3.3 billion, also very slightly below consensus
  • Adjusted EBITDA was $197 million, up 16% year-over-year
  • Adjusted EBITDA margin rose to a record 25.8%
  • Free cash flow was $75 million, up 22% year-over-year
  • Sirius XM ended the quarter with 21,349,858 subscribers
  • Net subscriber additions were 333,683, missing analysts' expectations.
  • Subscriber acquisition cost per gross addition was $55, down from $59 last year
  • Net debt stands at $2.4 billion
In years past, I held serious doubts about Sirius' and XM's (the companies which merged to form Sirius XM) ability to ever make money and manage their debt loads.

That view was wrong -- the combined company is making a little money, comfortably handling its debt load, and generating free cash flow.

Nonetheless, Sirius XM continues to face a unique structural challenge.

Last December, the company announced after drawn-out negotiations that ratings giant Howard Stern signed a new five-year contract, significantly reducing uncertainty over the company's near-term outlook.

However, we can't ignore the power he will always hold over Sirius XM.

Besides his ratings and popularity, what makes Stern uniquely powerful is that he has never hesitated to take to the airwaves to air his financial grievances, which automatically inserts significant uncertainty into the court of public opinion.

Let's remember that like with Netflix (NFLX) (see NFLX Earnings: Double Costanza Time After the Most Predictable Collapse of 2010), investors place a great deal of emphasis on Sirius XM's subscriber count, which directly impacts revenues and cash flow.

Should Stern ever choose to leave, the company will almost certainly bleed customers. That's a big long-term headwind in terms of investor perception, even though it's entirely possible that the company could be more profitable without him due to his enormous contract.

To be sure, Stern did more than a little posturing regarding his willingness to leave Sirius XM, but investors will always be wondering, "What if he really is serious this time?" (No pun intended.)

That's a big psychological hurdle. In fact, I think it's far more important than issues like new competition in music from Pandora (P) and Spotify.

Furthermore, despite trading well under $2, the stock's not very cheap. The company is barely profitable, but the stock is trading at nearly three times expected full-year sales.

I'm steering clear of this one.

Michael Comeau is just one of 30 professionals offering their trading ideas and market analysis in real-time on Buzz & Banter. Take a free trial to experience the Buzz.

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No positions in stocks mentioned.
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