Commentary: Satellite radio companies are problematic
By Chuck Jaffe , MarketWatch Last Update: 9:09 AM ET Mar 10, 2006
BOSTON (MarketWatch) -- Some investors are just like little kids: They love a good story, and the more outrageous the tale the better.
But investing is not like fairy tales; happily ever after is not a foregone conclusion.
So when investors buy a stock based on its story more than its financial underpinnings, they need to make sure they are not falling for tall tales.
Two of the tallest tales in investing right now amount to the entire field of competition for one business, and while the industry has tremendous potential, that rosy future is not enough to keep XM Satellite Radio and Sirius Satellite Radio from being the Stupid Investment of the Week.
Stupid Investment of the Week showcases the trouble spots and danger zones that make an investment less-than-ideal for the average consumer, in the hope that highlighting problems in one issue (or sometimes two), will make them easier to root out elsewhere. While obviously not a purchase recommendation, neither is this column intended as an automatic sell signal, as there may be times when unloading a worrisome investment simply compounds the problem.
In the case of XM ( XMSR ) and Sirius ( SIRI ), that problem could be huge capital gains for shareholders who bought in early, rode a rocket through 2003 and 2004, and who have held on through the steep declines the companies suffered from last year into 2006.
It is that downturn, however, that has non-shareholders thinking the satellite radio companies could be a buy, beaten down sufficiently to where they are a good deal. The story spurring most of these would-be bulls for the stocks is that having gone through an explosive growth phase, they are having a temporary "correction," a breather before the next sprint toward cashing in on the enormous potential of the business.
Here's where average investors should recognize a language problem. "Correction" is a technical term for a market reversal of more than 10 percent. In human terms, however, something that is wrong is what gets corrected, and the wrong that the market is currently correcting for XM and Sirius is overblown market value.
That problem won't be corrected for either stock until there's been a lot more pain.
More backsliding is hard to believe for two stocks off about 40 percent from their 52-week high and in a business with so much potential, so let's examine the plusses and minuses for XM and Sirus.
The story driving both of these stocks for the last few years has been potential, the idea that they have harnessed the next great technology. Both companies have deals with automakers -- XM with General Motors and Honda, Sirius with Ford and DaimlerChrysler -- that are putting their products in new cars (although not every buyer of a new car will shell out the bucks to use a satellite service when they can get traditional terrestrial radio for nothing).
Both stocks have seen the kind of triple-digit gains in the past that speculative investors dream about.
Moreover, satellite radio is a business that average investors feel like they understand, especially if they try the service and like it.
But tremendous growth is only an asset if a stock has the financial fundamentals to make it turn out right. Consider the report card that Morningstar Inc. gives both stocks: they each get an A for growth (Sirius gets an A+), an F for profitability and a D- for financial health.
If your kids brought home that report card -- especially when growth is the financial equivalent of an exercise class and the other marks are the heavy lifting -- you'd ground them for months.
The two satellite radio providers appear to be locked in mortal combat, living under "the prophecy" that guides the hero and villain of the Harry Potter books. That prophecy states that "neither can live while the other survives."
That means a buy-and-hold investor bent on capturing the potential of the industry is taking a gamble that easily could wind up being vanquished in the end. And while analysts seem to be giving XM the hero's position right now, it's almost a coin flip (as those similar Morningstar grades show).
"The kind of expenditures required to get programming and develop the infrastructure and get the subscribers is extraordinary, and they have been putting everything into it and they're still losing money," says Rudolph Martin, director of research for Weiss Ratings Inc., which has a sell advisory on both stocks. "They're still losing big money, and you can't expect a 180-degree turnaround.
"We'll play a story stock, but only if the fundamentals support doing it."
Both Sirius and XM have bloated price-to-sales ratios, and have monster debt that includes significant slugs that can be converted to common stock. That means that if the stocks ever do rebound, those debt holders stand ready to cash in and significantly dilute the value of current common shareholders. (Conversely, if the stocks were ever to wind up in bankruptcy, the debt holders would have seniority over those same shareholders; kind of makes the average shareholder wish they had those bonds instead.)
Trying to come up with a fair-value estimate on the stocks is hard, but it seems to be in the $2 range for Sirius and the $20 range for XM. If they get beaten down to those levels, some growth-oriented investors might declare them a buy, but the average investor wants to get in at a bit of a discount and then have the stock rise up to fair value or beyond.
That means that investors who like this story will need to see the stocks endure more pain before the satellite business looks like a buy again.
Says Robert V. Green of Briefing.com: "The potential is grossly overpriced into both of these stocks; they are overvalued and the best you could forecast for them over the next few years is that they might somehow grow into their current valuations. That's not a good situation for investors, no matter how much they love what the companies stand for."
Posts: 76 | From: CHARLOTTE, NC | Registered: Jan 2006
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posted
I would definently stay away from SIRI here...did anyone see Stern on Letterman last night?? Also Cramer on Mad Money just said not to buy...get in better stocks like ECR ...gl doling
Posts: 56 | From: Pa | Registered: Dec 2005
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SIRIUS Satellite Radio Passes 4 Million Subscribers Monday March 20, 8:41 am ET
NEW YORK, March 20 /PRNewswire-FirstCall/ -- SIRIUS Satellite Radio (Nasdaq: SIRI - News) today announced that it recently surpassed 4 million subscribers nationwide. (Logo: http://www.newscom.com/cgi-bin/prnh/19991118/NYTH125 )
Source: SIRIUS Satellite Radio
· Click Here to Download Image
About SIRIUS
SIRIUS delivers more than 125 channels of the best programming in all of radio. SIRIUS is the original and only home of 100% commercial-free music channels in satellite radio, offering 67 music channels available nationwide. SIRIUS also delivers 61 channels of sports, news, talk, entertainment, traffic, weather and data. SIRIUS is the Official Satellite Radio Partner of the NFL, NBA and NHL and broadcasts live play-by-play games of the NFL, NBA and NHL. All SIRIUS programming is available for a monthly subscription fee of only $12.95.
SIRIUS products for the car, truck, home, RV and boat are available in more than 25,000 retail locations, including Best Buy, Circuit City, Crutchfield, Costco, Target, Wal-Mart, Sam's Club, RadioShack and at shop.sirius.com.
SIRIUS radios are offered in vehicles from Audi, BMW, Chrysler, Dodge, Ford, Infiniti, Jaguar, Jeep®, Land Rover, Lexus, Lincoln-Mercury, Mazda, Mercedes-Benz, MINI, Nissan, Scion, Toyota, Porsche, Volkswagen and Volvo. Hertz also offers SIRIUS in its rental cars at major locations around the country.
Click on www.sirius.com to listen to SIRIUS live, or to purchase a SIRIUS radio and subscription.
Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions, future events or performance with respect to SIRIUS Satellite Radio Inc. are not historical facts and may be forward-looking and, accordingly, such statements involve estimates, assumptions and uncertainties which could cause actual results to differ materially from those expressed in any forward-looking statements. Accordingly, any such statements are qualified in their entirety by reference to the factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission. Among the key factors that have a direct bearing on our operational results are: our dependence upon third parties, including manufacturers of SIRIUS radios, retailers, automakers and programming partners, our competitive position and any events which affect the useful life of our satellites.
G-SIRI
Media Contact:
Patrick Reilly SIRIUS 212.901.6422 preilly*siriusradio.com
Jim Collins SIRIUS 212-901-6422 jcollins*siriusradio.com
Posts: 3417 | From: Cleveland, Ohio | Registered: Jan 2000
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I may be speaking too soon...but we might not see the $4s again. Yes, there are a lot of jitters with this stock, and there has been a lot of lemming action lately with a lot of unnecessary "piling on" of selling and flying off the deep end. But with subscription numbers way up and no huge and seemingly no more costly celebrity contracts slated for the near future, I see nothing but good news ahead. Some people are going to be cursing themselves when they realize that they sold in the $4s
Posts: 181 | Registered: Feb 2006
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...gl doling
