by Will Ashworth | May 3, 2012 10:51 am
On May 1, in his daily blog The Buzz, CNN Money’s Paul La Monica was talking up Sirius XM (NASDAQ:SIRI). La Monica believes the company’s stock, while expensive, isn’t overpriced given its position in satellite radio and its growth prospects. While it’s true that investors have an easier time analyzing the stock these days now that it’s making money, there’s still a lot to be wary of.
Analyst John Tinker of Maxim Partners sees SIRI’s earnings growing at almost 20% a year for the foreseeable future. Unlike its traditional competition in radio, Sirius XM is growing earnings and as a result deserves a higher valuation.
But Tinker is comparing Sirius XM to the wrong type of companies. Pure-play radio businesses such as CC Media (PINK:CCMO) and Cumulus Media (NASDAQ:CMLS) continue to have their work cut out for them as alternatives to local broadcasting — including Sirius XM — are making it difficult, if not impossible, for them to survive. Tinker really should be comparing Sirius XM to companies such as CBS (NYSE:CBS), which use radio as one of the many mediums for its advertising customers to reach their target audiences.
Furthermore, since satellite radio’s big advantage is mobility, what’s to stop a company such as Pandora (NYSE:P) from stealing its thunder. Or better yet, HD radio, which converts your local station’s analog signal to digital, giving you local news, etc., while providing better-sounding music at a fraction of the cost. Heck, even Apple‘s (NASDAQ:AAPL) iTunes is a legitimate threat.
The problem I see with comparing Sirius XM to regular radio broadcasters is it assumes that the future is going to get better for satellite radio, while traditional broadcasters continue a slow death. But neither assumption is anywhere near a certainty.
When it comes to debt, Sirius XM has enough to choke a horse. Excluding that owned by Liberty Media (NASDAQ:LMCA), SIRI had $2.63 billion at the end of March, with a debt-to-capital ratio of 76%. Care to guess what CBS‘s (NYSE:CBS) debt-to-capital ratio is? Excluding treasury stock, it’s 39% — almost half that of its radio rival. Sirius XM paid $77 million in interest in the first quarter, versus $110 million at CBS.
If you annualize those payments, Sirius XM paid 11.7% interest on its debt — 420 basis points more than CBS. It continues to amaze me that investors are willing to bet on companies that have too much debt and are paying hugely to service this debt. Have we not learned anything in the past four years?
Successful investing is all about separating the wheat from the chaff. Analysts can talk all they want about the growth potential of a company, but that’s often simply conjecture. In the latest quarter, CBS grew its revenues by 11.8% and its operating income by 46.9%. Sirius XM, on the other hand, grew its revenues by 11.1% and operating income 21.3%.
In both cases, CBS had better growth. Yet investors are willing to pay 32.3 times trailing earnings for Sirius XM’s stock, compared with 17.8 times for CBS. According to CBS CEO Les Moonves, the company will break financial records in 2012, as most of its businesses are firing on all cylinders. Meanwhile, Sirius XM is in a tug-of-war with John Malone’s Liberty Media (NASDAQ:LMCA), owner of 40% of its stock, which is looking to take control.
Lawrence Meyers believes the mere fact that Malone wants the entire business is evidence that Sirius XM is a good investment. I tend to view Malone’s interest in a somewhat different light. I believe he’s exercising his control at this point because now that SIRI’s profitable, he wants to ensure that his $530 million investment makes it to the finish line. The best way to ensure this is to have your hands firmly on the levers of control. I believe is a mistake to read any further into this situation.
Sirius XM has made a lot of progress in the last three years. There’s no denying that. However, rational investors will think twice before jumping aboard, and conservative investors will pass, opting instead for safer candidates such as CBS.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
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