While I believe satellite is a great deal at only $12.95 per month, especially considering the variety of programming, free always sounds better to a lot of people. Until Sirius XM proves me wrong, I actually think Pandora makes more sense as an investment right now. Since 2009, Pandora has been steadily beefing up their balance sheet, currently with around $100 million in cash and virtually no debt. Also, after just a few years in business (as compared to a decade for Sirius), Pandora is forecast to break even this year, and to become profitable beginning in fiscal year 2014.
After years of accumulating debt, Sirius XM finally seems to have it under control. From the period between 2003 and 2011, the company’s long-term debt increased from $195 million to $3 billion; however this has since decreased to $2.4 billion as of the most recent quarter.
Also worth noting is the $2 billion share buyback plan that was just announced in December. This is generally a good sign of financial stability and health in a company.
Another issue, not really financial “health” –related, but pertaining to the control of the company, is Liberty Media Corp (NASDAQ:LMCAD)’s recently announced majority (50.7%) stake in the company. This effectively gives Liberty control over Sirius XM. I don’t believe this is a major cause for concern, but I am certainly interested to hear what the company has to say on this matter during the call.
On that note, Liberty might actually be the best way to play Sirius XM for long term investors. You get exposure to Sirius while benefitting from Liberty’s more established businesses, such as their significant stakes in LiveNation and Barnes and Noble, as well as investments in Verizon and Time Warner. Liberty’s holdings are a nice blend of established, stable companies and speculative plays like Sirius.
If Sirius XM is going to continue to command the high valuations of a rapidly growing company, they need to demonstrate that they have a plan to rapidly grow earnings, not just revenues. Sirius XM currently trades for 35 times 2012’s earnings, which using my rule of thumb that P/E should be no more than twice the annual earnings growth rate of a company, Sirius needs to grow its earnings by 17.5% annually in order to justify this. To this point, more important than the actual numbers for 2012 are the company’s outlook to the future and its plan to grow for years to come.
The article Sirius XM Earnings Preview: Great Progress, Can They Keep It Up? originally appeared on Fool.com and is written by Matthew Frankel.
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