When you mention cult stocks that trade around a buck, one of the first names that pops to mind is Sirius XM Radio Inc. (NASDAQ: SIRI). The satellite radio purveyor is a classic case of a company with an exciting new technology with the potential to revolutionize an entire industry, in this case the so-called “terrestrial” radio space. To a large extent, that revolution has indeed taken place. Yet since the July 2008 merger of XM Satellite Radio and Satellite CD Radio (Sirius), the new SIRI shares have had a pretty tough slog. Although the shares now trade nearly nine times higher than their March 2009 nadir of a measly 6 cents, they are still light years away from the $2.68 they traded at just two years ago. So, will traders still tune in to SIRI, or will they turn their portfolios off to satellite? Here is five reasons why the next move for Sirius will be higher.
Very strong earnings. In May, Sirius reported very strong fiscal first-quarter earnings of $41.6 million, or a penny per share, on revenue of $670.6 million. The bottom-line figure beat Street expectations for flat earnings. The company also said it added 171,441 subscribers in fiscal Q1, a far cry from the loss of 404,422 in the same quarter a year ago. The cost of those new subscribers also fell from $61 to $59. The company’s free cash flow missed expectations; however, the lack of free cash was due to Sirius paying off its most expensive debt earlier than anticipated. Sirius actually paid off $61 million in debt that came with a price tag of 15% interest, and that reduced debt will likely contribute to its bottom line in the coming quarters.
Strong subscriber growth in Q2. On July 7, Sirius announced that it added 583,249 net subscribers in the second quarter. That number compared extremely favorably with the 186,000 in the second quarter of 2009. The company also raised subscriber gain guidance for the year, saying it expects net new subscribers of approx. 1.1 million. The previous full-year estimate was for just 750,000 new subs in the year. The gains in the second quarter give Sirius a record-high 19,527,448 subscribers, an increase of more than a million subscribers from the quarter ended June 30, 2009.
Zero competition. The strong subscriber growth means that consumers now are opting to spend money on discretionary items such as satellite radio. The more discretionary income available, the better Sirius will do. That’s because unlike other media choices such as cable or satellite TV, Sirius has no competition in the satellite radio space. They are the one and only customer option, and as such they are perfectly positioned to benefit from any boom in the willingness to adopt their king of service.
Rising auto sales. One big driver for Sirius is the expected improving metrics in U.S. auto sales. The company’s satellite radio systems are intimately linked with auto sales, as the service is primarily distributed through automakers. According to a recent report by Standard & Poor’s, new U.S. vehicle sales are on pace to rise 12.7% to 11.7 million units in 2010, and another 15% to 13.5 million in 2011. Improving auto sales will likely translate into more new Sirius subscribers, as the company has distribution deals with Chrysler, Ford (NYSE: F), GM, Honda (NYSE: HMC) and Toyota (NYSE: TM).
Leveraging the fear factor (time to buy the dip). There’s been a lot of selling in SIRI since the market turned down in May, and though the stock held up nicely throughout most of June, there’s been a wave of selling in late-June and early July. That selling has pushed Sirius shares below their 50-day moving average (see chart below), but they remain well above their 200-day moving average. With all of the aforementioned positives going for Sirius, traders could look at the recent dip in the shares as a great buying opportunity. Recent history tells us the stock has garnered big buying after falling below its 50-day average (December, March, May), and if that trend continues then the current dip means a renewed chance for traders to profit.
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