SIRI: Sirius XM’s Signal is Fading Fast

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sirius xm radioShares of satellite radio service Sirius XM Radio (SIRI) gapped up this morning after Liberty Media (LMCA) announced plans to buy out the company. However, word on the street is that another, better, offer may be forthcoming.

Is now a good time to buy SIRI shares on the speculation? Find out now.

Company Profile

While Sirius XM as we know it now has only been around since 2008 (created through the merger of Sirius Satellite Radio and XM Satellite Radio), this company’s roots stretch back to 1990, the founding of  Satellite CD Radio Inc. In a nutshell, Sirius XM Radio Inc. provides two satellite radio services in the U.S., as well as owns a minority interest in Sirius XM Canada.

The company has kept up with the times by offering customizable radio channels as well as launching radio applications for the iPhone, Android and Blackberry. So despite assertions that Sirius could go down with radio, the company has managed to grow its subscriber base consistently over the past few quarters.

Headquartered in New York, the company brings in over $3.4 billion in annual sales and has a workforce of nearly 1,600.

Buyout Buzz

On Friday, Liberty Media announced an offer to make Sirius XM a wholly owned subsidiary. If approved, SIRI shares would be converted into new Liberty Series C shares. At the proposed exchange ratio SIRI shares are now valued at $3.68 per share (based on Liberty’s Series A closing price on Friday).

In 2009 Liberty became a major shareholder of SIRI when it lent several hundred million to the struggling company. SIRI shares now trading well above the deal’s valuation as some believe that a better deal is forthcoming. Despite the hype, I wouldn’t advise putting new money into this stock. The fact remains that the company’s earnings propsects aren’t strong enough to justify buying in right now.

Earnings Preview

Sirius XM Radio is due to report fourth-quarter earnings towards the end of January. But judging from the recent analyst activity it’s shaping up to be another lackluster report. Over the past 90 days, the analyst community has cut its consensus EPS estimate by 1 cent per share. That may not sound like much, but given that the company is now expected to post earnings of 2 cents per share, it’s a pretty huge cut.

As it stands, Sirius XM is expected to post flat earnings and just 9.9% annual sales growth. Sirius hasn’t been able to beat analyst EPS estimates for the past several quarters (with two massive earnings misses in the past year), and it doesn’t look like this earnings report will buck the trend. While those estimates do improve heading into FY 2014, there’s too much uncertainty to justify holding this stock for the long haul.

Current Ratings: Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. While SIRI started 2013 on a high note, it didn’t take long for things to sour for the satellite radio company. After a series of disappointing earnings announcements last summer, SIRI fell from an A-rated buy to a D-rated sell in a matter of months.

Since October the stock has been beaten down in terms of institutional buying pressure—SIRI currently receives an F for its Quantitative Grade, which inidicates the stock’s risk-to-return ratio.

Meanwhile, the company’s fundamentals need some work—of the eight financial metrics I graded SIRI on, it outright failed on four: Operating margin growth, earnings momentum, earnings surprises and analyst earnings revisions. The company receives Cs on earnings growth and cash flow so SIRI receives a D for its overall Fundamental Grade.

Bottom Line: As of this posting I consider SIRI a D-rated Sell. Now would be a good time for current shareholders to sell into strength.

Would you like to check the fundamentals backing up one of your stocks? For more stock grades, please visit my Portfolio Grader website!

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