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Satellite Radio Could Bounce Back


Satellite radio has been generating revenue and has reworked its business plan for the new environment


Sirius XM Radio (SIRI) was first featured in my newsletter in February 2011, and has done pretty well since. As of mid-August, Sirius was up 38%, versus an overall 2.5% decline for the Russell 2000 (^RUT).

It's being featured again, first because it is worthwhile in general to refresh our analysis, and second because this stock -- unlike most in our universe -- is so heavily followed it can be hard for investors to cut through the exorbitant level of clutter and focus on substance.

Obviously, as has been the case from day one, we have to contemplate the prospect that someday superstar shock-jock Howard Stern will leave Sirius, although we have no idea when that will happen. It will hit revenues, but it will also take a big chunk out of cost.

I think Sirius is a very valuable service beyond Stern (to whom I listen much less frequently than when I first subscribed), but if you are worried, then make things easy and take profits now. Beyond that, there are three key issues:

  • cash generation
  • auto installations
  • service evolution

At one time, cash generation was a matter of corporate life or death. There's still lots of debt, but Sirius generates plenty of cash flow, enough to be gradually reducing its borrowings.

Meanwhile, the interest coverage ratio in the past 12 months has been a comfortable 4.5. When all is said and done, leverage (the relationship between variable operating profit and more-or-less fixed interest expense) could be a big plus going forward, as modest gains in the former produce disproportionately large gains in net income, enough potentially to justify the stock's currently high growth-oriented valuation metrics.

With auto installations still vital to SIRI, it would obviously be nice if new car production were better, a phenomenon that will require a generally stronger economy, although the aging of the vehicle fleet might help a bit even if the economy remains sub-optimal.

But at least Sirius continues to do as well as can be expected given the environment it faces. In 2011, it was in 67% of new vehicles, up from 46% in 2008. And it's now penetrating the pre-owned vehicle market.

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No positions in stocks mentioned.
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