Sirius XM Radio Inc (NASDAQ:SIRI) is up over 10% during the last three months as it makes strides to return capital to shareholders, namely through a recent special dividend of $0.05, which is a 2% yield at the satellite radio company’s current stock price. Sirius’s $2 billion share repurchase program was also recently approved. Sirius is one of billionaire Julian Robertson’s best bets (check out the Tiger’s favorite picks).
Liberty Media Corp (LMCA) remains Sirius’s top shareholder with 49.8% of the company, and plans to participate in the repurchasing on a pro rata basis. In doing so, Liberty hopes to keep is ownership interest unchanged pending FCC approval of its application to take a controlling stake (50%+) of Sirius. Billionaire Warren Buffett is the top investor in Liberty Media with 5.5 million shares (check out Warren Buffett’s newest picks).
The return of capital to shareholders comes as the company is asserting its cash flow generating capabilities, where it recently generated $220 million in cash flow from operations last quarter and boasts a cash position of $550 million. We see reasons to buy beyond just Sirius’s two recent initiatives. Other interim catalysts should be management’s continued ability to execute growth strategies and rising auto sales. Third quarter results came in better than expected with EPS of $0.03, compared to consensus estimates of $0.02. The satellite radio company is also showing robust subscriber growth, adding a record high 446,000 subscribers in 3Q, up 34% year over year.
Sirius’s other metrics for 3Q showed a stabilizing business model that includes an unchanged churn rate and rising conversion rates. Solid subscriber growth is expected to continue for full year 2012, with recent guidance suggesting a total of 1.8 million net subscribers for the year, up from previous estimates of 1.6 million. Revenue guidance was also lifted following the 3Q earnings announcement, up to $3.4 billion from $3.3 billion, which is expected to translate into $700 million of free cash flow. Billionaire Steven Cohen is the top fund owner of Sirius with over 131 million shares (see Steven Cohen’s top picks).
Liberty Media is reporting strong results for its own business (including the spin-off Starz LLC segment) to help the media company fuel stake increases in its big investments – Sirius, Barnes & Noble and Live Nation. Of its investments, it appears that Sirius will provide the most promising growth. Even so, Liberty is expected to see earnings decline over 10% annually for the next five years. Assuming Liberty can get full control of Sirius, this could change, but the fact that Liberty still trades at 32x forward earnings and is up almost 40% year to date leads us to remain cautious.
An important competitor to Sirius’s business model comes from new player Pandora Media Inc (NYSE:P), which is down almost 40% since its 2011 IPO. Pandora is looking to enter the auto market by offering streaming radio services in new vehicles. With Sirius owning nearly 70% of the market share for new car sales in the U.S., we would not consider Pandora an enormous threat for now. Pandora also has other competitors to contend with in its core market, namely Spotify.
Cumulus Media Inc. (NASDAQ:CMLS) is a very small competitor that trades at the cheapest forward P/E of the five stocks listed here. The commercial radio station operator is down almost 30% year to date after some huge earnings misses, including a 1,300% 1Q miss. Cumulus now trades at the bottom end of the industry at 10x earnings and 2.7x cash flow. Saga Communications, Inc. (NYSEAMEX:SGA) is another small-cap radio station competitor. Saga trades cheap as well at 12x earnings, but we believe these radio stations trade cheaply for a reason – Saga is expected to grow five-year EPS at only 2% annually. Saga did manage to pay a special dividend recently that amounted to $1.65, i.e. a near 4% yield for investors.
We remain less concerned over Liberty’s potential to gain complete control of Sirius; as the satellite company shows the ability to execute its strategy, we see no reason that Liberty would initiate a complete overhaul. Sirius’s pure play status as a leader of satellite radio service, primarily in autos, makes the valuation stats somewhat moot when compared to other media and Internet radio companies. Sirius trades at 27x earnings, whereas Liberty Media is at 32x, but it also trades well below Liberty on a price-to-cash flow basis at 3.1x, compared to Liberty’s 7.3x ratio. We believe Sirius’s positive outlook also bodes well for Liberty, but we prefer Sirius’s valuation and concentrated business model.
