Sirius XM Radio Is a Zombie Stock

Sirius XM Radio (NASDAQ: SIRI ) refuses to die. The satellite radio provider
last escaped the guillotine in 2009 after John Malone's Liberty Media agreed
to invest $530 million to enable Howard Stern's corporate home to avoid
bankruptcy. Shares at the time were trading for six cents. Yesterday, they
closed at a $1.80. While that's a humongous share price increase, the low
stock price also reflects the continual unease that many investors have about
New York-based Sirius, which long has been a favorite of short sellers. During
the last earnings conference call, CEO Mel Karmazin told Wall Street that Sirius
would add 1.6 million subscribers in 2011, a 13% increase versus last year. He
also dismissed talk about upstarts such as Pandora (NYSE: P ), which has tumbled
more than 20% since its June IPO, and bragged about the rise in Sirius' free
cash flow. "I know that there is a great deal of conversation about all the
competition we face, but SiriusXM is so well positioned in this market we
continue to grow, and as a matter of fact, our growth in subscribers is
accelerating year-over-year," Karmazin said on the earnings conference call .
"This growth is a verification of our unique and very desirable service."
The fact that Sirius still exists is a tribute to Karmazin's management savvy.
The company had $528.33 million in cash and equivalents as of the most recent
quarter. Long-term debt topped $2.6 billion. The company has more than 21
million subscribers while only allowing total operating expenses to rise 2% in
the last quarter. Its churn rate was stable and its subscriber acquisition costs
fell. Many new vehicles sold in the U.S. today are equipped with a satellite
radio, a technology some expected to go the way of the Betamax by now.
Nonetheless, there is little to recommend about the stock. Sirius trades at a
lofty price-to-earnings multiple of 75 based on earnings estimates for the
current year. Remember, the average multiple for the S&P 500 is about 16. The
company earned $173.3 million, or three cents per share, in the second quarter.
Although that is a vast improvement over the previous year, its still pathetic.
Revenue rose 6.4% to $744.4 million, which was below Wall Street expectations.
The company expects revenue to hit $3 billion in the current fiscal year, which
also is pretty weak. Analysts have an average target price on Sirius of $2.40.
The shares are being pushed up by the hype surrounding its next-generation
radio, dubbed Sirius 2.0. Two devices are slated to be released later this year
that will contain enhanced features and functionality. The company has not given
a specific date, though it expects to announce a deal by the end of the year for
Sirius 2.0 to be factory-installed by one of its OEM partners it declined to
name. When it comes to Sirius, investors need to be cautious. A good, stiff wind
will send the shares careening into an abyss. Pandora, though much smaller than
Sirius, remains a long-term threat. A double-dip recession will cause auto
sales, which weakened in the second quarter, to fall further. That will, in
turn, hurt Sirius. Cash-strapped consumers also will be more apt to curtail
discretionary spending on items such as satellite radio subscriptions. Moreover,
Liberty received 12.5 million preferred shares in Sirius as part of its
financial rescue of the satellite radio company. They are convertible to up to
40% of Sirius' common equity . That alone is reason to avoid the stock.
Jonathan Berr does not own shares of any of the companies listed. Follow him on
Twitter at @jdberr.