Now that media mogul John Malone’s Liberty Media (NASDAQ:LMCA) has won FCC permission to take over Sirius XM Radio (NASDAQ:SIRI), the question remains whether the heavily shorted stock is worth the risk.
Shares of the company have surged more than 54% over the past year, though one should remember that the stock’s low price makes small gains seem dramatically large. Revenue surged 14% to $867 million in the latest quarter while net income fell because of the additional costs of retiring debt.
“The Company has produced more free cash flow in the first nine months of this year than in any full year in its history, and we’ve used this cash to reduce our debt to its lowest level since the merger of Sirius and XM,” now-former CEO Mel Karmazin noted in the earnings press release.
As of the last quarter, Sirius added nearly 1.5 million net new subscribers — 27% more than what the company added in the first 9 months of 2011. In a conference call with analysts, Karmazin boasted that fourth quarter would be “another good one” for the company.
“We will meet or exceed our new subscriber guidance for 2012 of 1.8 million net additions,” he said. “We believe that this is still conservative.”
Of course, the company also faces plenty of challenges. A big one, in the wake of Liberty’s takeover, is that it has to win over investors that were drawn to the stock because of the charismatic former CEO Karmazin.
Karmazin helped bring big names like Howard Stern to satellite radio, but resigned when it became clear that his efforts to block Liberty Media’s takeover of Sirius would fail. Malone saved New York-based Sirius from bankruptcy when he lent the firm $530 million, earning about $2 billion from his investment.
After Liberty’s takeover of Sirius is completed in 60 days, Malone is expected to spin off the satellite radio provider.
Malone is smart enough not to kill the goose laying the golden egg; he tried to convince Karmazin to stay. Karmazin, though, had his fill of bosses after a dust-up with Sumner Redstone when he worked at Viacom (NASDAQ:VIAB).
Instead, one of the first decisions that Malone and Liberty Media CEO Greg Maffei have to make is whether to retain interim CEO James Meyer, who was named to the job after Karmazin resigned last month. Meyer was the company’s head of sales.
Another uncertainty: Stern’s future with Sirius. The self-proclaimed “King of All Media” has sued his employer over stock awards tied to his original contract. Stern has said for years that he might retire one day soon and others speculated that he might even return to terrestrial radio. Both scenarios seem likely.
On top of that, competition for Sirius is certainly heating up. Rival Pandora (NYSE:P), for one, recently reported a 104% increase in quarterly listener hours. Spotify boasts 20 million users and 5 million paying subscribers. Plus, the satellite radio provider’s costs are rising. A panel of three federal judges recently decided to raise the royalty rates paid by Sirius.
Of course, one critical difference is that Sirius is profitable and Pandora is losing money. (Privately owned Spotify does not release financial information, but odds are it is in the red as well or marginally profitable at best.)
And as for Stern, even if he left Sirius’ airwaves, the company has a plethora of talent and exclusive contracts to retain the interest of listeners.
All in all, there are a lot of factors weighing on Sirius XM’s future. The headwinds, though — while undoubtedly there — are all pretty vague; most stem from the departure or possible departure of an important personality. The company’s recent numbers, on the other hand, are much more compelling.
On top of that, auto sales should continue to rise as the economy slowly emerges from the worst economic slowdown since the Great Depression, so Sirius’ results should continue to improve. The company’s service is offered in most if not all new cars sold in the U.S. and about 7,000 used car dealers are offering trials of the service.
At the end of the day, Sirius has defied the naysayers before and probably will do so again.
As of this writing, Jonathan Berr did not own a position in any of the aforementioned securities. Follow him on Twitter @jdberr.