Shareholders of satellite radio service Sirius XM Holdings (SIRI) have had a pretty stressful year. The stock has weebled and wobbled its way to flat gains year-to-date, including a 15% peak-to-trough drop, and SIRI stock is actually down 10% over the past year.
Sirius XM Earnings
Sirius XM earnings fell 4.4% to 2 cents per share on revenues that grew 10% to $1.04 billion; the former figure matched Wall Street expectations and the latter topped estimates for $1.02 billion. Meanwhile, adjusted EBITDA ramped up by a robust 31% to $370 million, an all-time high, and the company also notched up its revenue forecast from $4 billion to $4.1 billion.
The cash situation is strong, with Sirius XM now expecting 2014 free cash flow of $1.1 billion, and the company is using that money to aggressively buy back shares. The company has bought back $1.6 billion worth of SIRI stock this year, and earlier this month, Sirius upped its repurchase program by $2 billion.
The key driver for Sirius XM has been the continued strength in subscriber growth. In Q2, the company added 475,000 net new customers, bringing its total to 26.3 million. That represents a year-over-year growth rate of about 5%. Still, the company believes there are 60 million satellite-enabled cars on the highways that it can expand service to, and it’s aggressively marketing to the used-car world.
The Bull Case for SIRI Stock
Now it’s true that many skeptics think streaming technology and mobile apps will erode Sirius XM’s user base — that companies like Pandora (P) and Spotify, as well as potential threats from the likes of Google (GOOG) and Apple (AAPL), will win out. But so far, there are few signs of deterioration.
One of the main reason is Sirius XM’s long list of compelling exclusive content from celebrities such as Howard Stern, Joel Osteen, Oprah Winfrey, Martha Stewart and Jenny McCarthy. Plus, Sirius also serves several broad sports interests, boasting channels for NASCAR, NFL and MLB.
Meanwhile, Sirius XM is making additional investments for the emerging trend of the “connected car.” To this end, the company purchased Agero’s auto services unit, which is a top provider of telematics, safety systems and security — a company that has snagged customers including Honda (HMC), Toyota (TM) and Nissan (NSANY), which includes luxury brands Lexus, Infiniti and Acura.
Lastly, SIRI stock should benefit nicely from a steadily improving economy, which has helped spark a jump in car sales. Improving job growth also should lead more consumers toward buying subscriptions.
Two criticisms of SIRI stock would include its price — which is more than fully valued at 28 times next year’s earnings — as well as the stock’s position as a trading vehicle. Shares, which trade for only $3.40 as of this writing, exchange hands at roughly 46 million per day, more often than not seeming disconnected from the fundamentals and resulting in more volatility than the broader market.
Nonetheless, the actual story of Sirius XM is a good one. SIRI has tremendous scale, consistent recurring cash flows and a habit of buying lots of shares. So for investors looking for an interesting media play for the car market, SIRI stock looks like a pretty good choice.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.