Satellite radio kingpin Sirius XM Radio (SIRI) finally broke back through the $1/share barrier a couple of weeks ago after nearly 18 months in penny stock territory. But the euphoria didn’t last too long, as the stock opened below $1 this morning and has been struggling to get back to the heady levels of last week. Volume is very heavy, at more than 52 million shares in the first hour of trading, not far from the three-month daily average volume of 53.5 million shares.
Hope may spring eternal, but it rarely outguns solid analysis. The day after Sirius reported its fourth quarter 2009 and full-year earnings, an article in the Wall Street Journal calculated that Sirius shares were worth only about a quarter once the value of the preferred shares given to Liberty Media (LCAPA/B, LINTA/B, LSTZA/B) were converted to common shares. That would give the satellite radio company an enterprise value some 18 times earnings.
That’s pretty rich for a company in a business that typically offers an 8x value-to-earnings ratio. To reach its numbers, Sirius depends heavily on new car purchases in order to add new subscribers. Indeed, Sirius’s own projections for 2010 include adding half a million new subscribers to the service this year.
That may be optimistic, given that new car sales are not expected to grow this year; in fact, many analysts expect a decline from last year’s already low sales. The recall troubles at Toyota Motors (TM) will ripple through the auto industry, and many potential buyers are expected to stick with their current cars rather than enter a market for new, lower-perceived-quality cars.
If Sirius is able to add 500,000 new subscribers this year, the company says that will bring it’s subscriber base to more than 19 million. At least one analyst expects the company to add just 199,000 new customers this year. At the end of the fourth quarter 2009, Sirius had more than 300,000 fewer subscribers than the year ago quarter, finishing the year with 18.6 million subscribers.
And new subscribers are likely to get less for their money. Sirius reduced its programming and content costs by 12% in the fourth quarter. The company reached this level by laying off people and cutting its on-air talent costs. Somehow, offering a lower quality product doesn’t seem like a sound long-term strategy for growth.
It appears now that Howard Stern has decided to return to the Sirius fold. That’s good news for the company if it turns out to be true. But no new contract has been announced yet, so it’s still too early to bank on Sirius retaining its biggest star.
Sirius still has no serious competitor in the satellite radio business, but companies like Spotify, which allows listeners to subscribe to a personalized music service via mobile phone, could cut into demand for Sirius radio.
It may take a while for that to happen, but the technology marches on and prices fall all the time. Sirius may not be down to $0.25/share yet, but that is the stock’s direction for 2010.