Buying Into Sirius XM Radio Inc (SIRI) For The Long Run

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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).

Warren Buffett portrait

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.

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