SuperModels Community
Join the discussion in the MSN Money SuperModels Community.
SuperModels
Recent articles:
• Look for holiday stocks ... in April, 4/27/2005
• Why market skeptics see a huge opportunity, 4/20/2005
• Pfizer's pain can be your gain, 4/13/2005
More...
| | SuperModels
Are investors finally wise to Sirius?
The satellite radio company is adding subscribers in droves but deepening losses as it wildly overpays for snazzy content deals. No wonder 3 top execs dumped 1 million shares last month.
By Jon D. Markman
Each new day seems to bring once highflying stocks back down to Earth. One of the most gravitationally challenged is Sirius Satellite Radio (SIRI, news, msgs), whose market value has tumbled 36% since the start of a year in which it was supposed to be launched on its path to glory.
Last week, Sirius beamed out word that it had added 305,437 subscribers during the first quarter, a huge leap over the 90,602 added in the same period a year ago. That brings its total number of subscribers to 1.45 million through the end of March. It said revenues rose fourfold to $43.2 million in the quarter, from $9.3 million last year. And it lifted guidance for the full year, stating that it expected to conclude its 2005 campaign with 2.7 million subscribers, a couple hundred thousand more than its prior estimate.
In prior times, a quadrupling of subs and a boost in estimates would have catalyzed a big move up. But it appears investors are finally getting wise to the satellite-radio scheme. This time, Sirius promises elicited a big yawn. Shares remained beneath the critical $5 level that tends to distinguish investment-grade issues from speculative ones, far off their $9.45 peak late last year. Even when the rest of the market rallied on Friday, shares of Sirius barely budged.
No longer impressing investors
The problem at Sirius is that earnings continue to be far more elusive than revenue, and investors are no longer impressed with its tiresome showcase deals for talent. In the most recent quarter, the company lost $193.6 million, which compared unfavorably with a loss of $144.1 million in the same period a year ago. And for the entire year, the company now forecasts a loss of $510 million, deeper than its previous guidance of a $480 million loss.
Yes, Sirius now contemplates losing half a billion dollars this year despite seeing decent subscriber growth. And the reason, as it explains deep in its press release, is increased subscriber acquisition costs to support higher gross subscriber additions. In other words, the more subscribers it gets, the more money it will lose. Nice business.
Hot deals, money snookered from investors
Of course, Sirius doesnt just lose money -- it ingests it. In March, the company announced a $250 million issuance of senior notes. Some of the money was earmarked for the refinancing, at lower rates, of two smaller issues with coupons of 14.5% and 15%, but about $187 million was headed toward the companys cash hoard, which totaled $754 million at the end of last year. It says it needs the money to underwrite its business plan until becoming free-cash-flow positive in 2007, which only really means a sucker is born every minute.
Sirius finds itself in this fix because it insists on wildly overpaying for content with the money snookered from investors, offering $100 million annually to shock jock Howard Stern for five years starting in 2006 -- and another $188 million cash, 15 million shares and warrants for 50 million shares to the National Football League for seven years of exclusive broadcast rights. These deals have garnered Sirius publicity, but the numbers for the latter, in particular, just dont pencil out financially or intellectually. People use satellite radio in their weekday commute to avoid commercials -- not to listen to some other citys football games on a Sunday when there is a far better alternative, called television.
Related news and commentary on MSN Money
The folks who judge bond issues at Standard & Poors have studied the Stern and football deals, and estimate that while they could lift Sirius subscriber count to 6.7 million by the end of 2006, cash-flow breakeven is a 2008 event at best. Conventional losses are still on the horizon as far as the eye can see.
Losing ground to rivals
Someone needs to remind investors in this company that the radio industry isnt exactly a growth business thats spawning a lot of millionaires. Clear Channel Communications (CCU, news, msgs), the largest radio conglomerate in the Western Hemisphere, has shed 64% of its value since 2000, and losses at radio unit Infinity recently led Viacom (VIA.B, news, msgs) to take a whopping $10.9 billion charge against earnings. Moreover, Sirius isnt even the best satellite-based business model out there, as it continues to lose ground to rival XM Satellite Radio Holdings (XMSR, news, msgs), which has more than twice as many subscribers, or around 3.8 million.
So why is the company still valued more like a cure for blindness, cancer and bad breath -- sporting an otherworldly price-to-sales multiple of 95, or eight times more than the incredibly profitable online retailer eBay (EBAY, news, msgs) and even three times more than the demonstrably more successful and responsible XM Satellite? Good question, since its future is primarily now tied to one of the scariest industries on the planet, and that is U.S. automobile makers.
The one thing that XM has going for it is active marketing support and a factory installation deal from its partner and major shareholder, General Motors (GM, news, msgs). Sirius, in contrast, has depended on Ford Motor (F, news, msgs), which has so far failed to fulfill hopes that it would provide factory installation of its radios as a standard option. Indeed, Sirius has decided to spend madly on content specifically in an attempt to overcome the handicap of having a less capable partner. Fans of the company note that Ford offers Sirius radios as a dealer option in much of its line, but they dont seem to understand that until satellite radio becomes a standard factory option across the entire line, it will never achieve its goal of achieving mass media status.
A concept losing its appeal
Meanwhile, the economy and technology do not stand still. A $12.95 monthly subscription may sound reasonable to early adopters of gizmos in an expanding economy, as the country enjoyed in 2003 and 2004 when Sirius optimism was rising. But during a time of diminishing economic growth, stagnant job and wage growth, and rising energy prices, thats an expenditure that can be indefinitely postponed so long as a free alternative remains available. And at the same time, wireless-phone carriers and makers of MP3 players are homing in on their own ways to provide uninterrupted, narrow-niche music streams.
Back in November, investors were drawn to the idea when it was learned that new Chief Executive Mel Karmazin bought 1.5 million shares at $5.36. Hes now 10% under water on that buy, while three longtime executives at the company, including Chairman Joe Clayton, late last month combined to dump 1 million shares at around $5.25.
Brokerages who drool over the possibility of getting Sirius stock-and-bond underwriting business have slapped price targets ranging from $6 to $9 or more on the stock. But the much more objective and conservative analysts at Morningstar believe shares are worth no more than 50 cents. Giving the company an ever-so-slight benefit of the doubt on its grotesquely optimistic growth plans, I might contemplate buying the shares in the low- to mid-$3s as a speculation even though, in some respects, it is worth less now than it was when it sold for that price a year ago due to dilutions from endless secondary stock sales and obligations to the NFL, Stern and NASCAR that stretch well beyond visibility range.
In short, listen up: No matter how much you enjoy satellite radio in your car, this is still not a stock to buy in the $4s and $5s and stow away in your glove box. Wait for inevitable disappointments later in the year to knock it down, and then consider only as a speculative buy.
Fine print
Many readers have asked for an update from analyst Michael Belkin, whose bearish views I first featured in a column in October 2003. (Market prophet is battening the hatches). He ultimately turned bullish last September for the fourth quarter of 2004, then resumed his bearish posture in late December. Hes still on the bear trail, stating in his April 24 research report to clients: Trend analysis suggests the long-term bear market that began in 2000 is still in force. A decline in the direction of the 2002-2003 bear market lows is likely. Group rotation forecast favors higher yielding utilities, REITs, regional phone companies, beverages, household products and pharmaceuticals. We recommend taking advantage of every opportunity to sell into strength. I last wrote about Sirius on Dec. 8 (iPod vs. satellite radio: serious trouble for Sirius,). It turns out that was a day after its 52-week peak. In September last year, I explained that Coca-Cola (KO, news, msgs) had the potential to be the real thing again, after years of missteps. The stock was trading around $38 then, but has steadily crept back into investors favor, and broke out to an eight-month high on Friday, to $43.44. Sirius announced a plan last month to pay Martha Stewart $30 million over four years to supply content for a 24-hour channel. Wait a minute. Shouldnt Martha Stewart be paying Sirius for the distribution? Goes to show you how spend-happy this company is. Ill be speaking on May 11 and 12 at the MoneyShow in Las Vegas. Stop by if youre in town.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, Markman had no positions in stocks mentioned in this column.
|
