Sirius XM Radio (NASDAQ:SIRI) shares jumped nearly 4% Monday after the New York Post reported that billionaire John Malone’s Liberty Media (NASDAQ:LCAPA) was set to ��double down�� on his earlier bet on the satellite radio provider that saved it from bankruptcy. That would surely give Sirius some added lift. But even if the rumor is baseless, investors should bet on the company.
For one thing, its stock is reasonably valued. Sirius trades at a price-earnings ratio of 51.43, still high but cheaper than where it has been in the past five years, according to Reuters. Its multiple on a price-sales basis is 2.25, in line with the S&P 500��s 2.11. Year-to-date, Sirius is up more than 13%, beating the NASDAQ Composite index, which is off almost 5%. Wall Street has a mean price target on the New York-based company of $2.30, well above the $1.85 level where it closed Monday.
Plenty seems to be going right for Sirius. As of Sept. 30, it had a record subscriber base of more than 21 million, up 7% from a year earlier. ?Its churn rate of 1.9% has remained stable. Free cash flow for the first nine months of 2011 was $224 million, higher than the $210 million generated during all of 2010. Malone, who lent Sirius $530 million in 2009 in exchange for a 40% stake through preferred voting shares, has earned a 15% return on his loans, according to the Post. Unfortunately, because of its high debt load –? more than $2.6 billion as of the last quarter — Sirius doesn��t earn much money.
Wall Street analysts expect the satellite radio provider to earn a whopping 1 cent per share in the current quarter and the next quarter. It earned 2 cents in its latest reported earnings.
No doubt, Sirius has its share of critics, and many investors expect it to fail. There’s the overhang of the Howard Stern lawsuit and myriad rumors that swirl around the stock, which has a huge short interest.
! But ther e are many reasons to expect Sirius to do much better than it is today, though its stock price is never going to be confused with Apple��s (NASDAQ:AAPL). In September, Sirius raised the price on its most popular radio package. Unlike at Netflix (NASDAQ:NFLX), Sirius customers did not rebel because the increase was a modest $1.50.
For some people, satellite radio is the perfect entertainment medium. Some 3.4 million Americans endure ��extreme�� commutes of 90 minutes or more each way, a number that��s increasing as people are willing to travel greater distances for scarce opportunities for advancement. Let��s not forget the 1.8 million or so tractor-trailer drivers who rely on satellite radio to help them pass the time on the open road.
Auto sales, a big source of satellite radio revenue, are on the rebound. J.D. Power & Associates recently noted that November new-vehicle sales are forecast to be 791,900 units, a seasonally adjusted annualized rate of 11.3 million units. That��s the highest monthly selling rate in three-and-a-half years.
Satellite radio will retain its profitable niche in the media landscape for years to come.
Jonathan Berr does not own shares of the aforementioned stocks. Follow him on Twitter @jdberr.
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