For music-lovers, two of the best radio services out there are Sirius XM Radio (NASDAQ: SIRI) and Pandora Media (NYSE: P), though each company hits the airwaves in a vastly different manner. The former provides satellite-based tunes for your automobile or home stereo at a cost, while Pandora is a predominantly ad-supported web service that is free. Yes, there is a version of the latter with no ads, but only a small percentage of customers elect to pay for this feature. In recent weeks, insiders at both companies have been selling their shares at a rather significant rate. While insider trading activity is obviously not the only indicator of a stock’s future swing, it does provide a good starting point for investors. In fact, empirical studies have proven that those who mimic or ‘monkey’ insider purchases can outperform the broader markets by up to 7 percent.
In 2012, SIRI has returned a healthy 9.3 percent, and the company recently reported better than expected first quarter earnings. Interestingly, a whopping nine different insiders have sold this stock since January, and there have been no purchases of any kind. Altogether, these execs have sold 55.7 million shares for a total market value of nearly $115 million. One of the most active insiders has been the company’s general council L. Patrick Donnelly, who has accounted for around a fifth of these sales. Moreover, Andrew Scott Greenstein, the company’s Chief Content Officer, has closed out his position in the stock by selling over 7 million shares for a total value of $18 million. The most troubling transactions, though, have come from Sirius’s CEO Mel Karmazin, who sold 11.5 million shares in April and another 17 million last week. Primarily a result of Karmazin’s stock options, these total a value close to $60 million. Intriguingly, SIRI stock has actually been in the green since the CEO’s move last week, and currently trades just around $2 a share.
Like Sirius, Pandora has been favorable to investors’ pockets this year, gaining 35.5 percent in the past month to flirt with a price of $12. On May 23rd, the company reported a Q1 loss of 12 cents a share, though this was much better than Wall Street had hoped, as forecasts expected a loss of 17 cents a share. Subsequently, Pandora’s stock has seen a boost of more than 10 percent since the announcement. It seems that many of the company’s execs missed out on most of these gains, as nine of them have sold a combined 861,398 shares for a total value of almost $10 million. Earlier this month, Chief Revenue Officer John Trimble and Chief Secretary Delida Costin closed out their positions in P, exercising more than $300,000 worth of stock options. Interestingly, the company’s CEO Joe Kennedy has not sold any shares of P this year.
Aside from a predominantly bearish insider trading sentiment, both of these radio companies have seen their revenues grow in recent years. Specifically, SIRI sports a 3-year average revenue growth rate of 21.9 percent, which is above the industry average (10.9%), though P’s is much higher (142.1%). Moreover, Pandora looks more attractive in the cash flow department, as it has doubled its operating cash flow over the past year, compared to SIRI’s paltry 6 percent growth. One advantage that SIRI has over P, however, it in its bottom line. In 2011, the company posted a $0.07 EPS compared to Pandora’s earnings loss of -$0.19.
From a valuation standpoint, SIRI also looks like the more attractive investment, as its current Forward P/E (19.0X) is far below that of Pandora’s (255.2X). In fact, when growth is factored into the equation, a PEG ratio of 0.5 signals that shares of SIRI may be undervalued. Since its merger with XM Radio in late 2007, its earnings have historically traded at a premium of 136 percent above the S&P 500’s average. Currently, this premium is only 85 percent.
On a macroeconomic scale, both of these companies operate in an industry that has been shrinking by 4 percent each year since 2007. It is most likely that Pandora and Sirius have been able to grow in this industry due to their unique niches. More traditional radio competitors like Cumulus Media (NASDAQ: CMLS), Corus Entertainment (OTC: CJREF), and the privately held Westwood One have all struggled in comparison. Going forward, both P and SIRI will face competition from up-and-coming innovators, most notably the privately held Spotify, so this situation is worth monititoring. Among the hedge funds that hold these stocks, there are two that standout. Brian J. Higgins’s King Street Capital holds roughly 20 percent of its holdings in P, while Brian Kelly holds 10 percent of his Asian Century Quest fund in SIRI. Due to Sirius’s advantages in earnings and valuation, the best strategy may be to use pairs trading by going long SIRI/short P.