Buy, Sell or Hold: Up 3,400%, Is It Time to Tune in to Sirius XM?

From streaming online, to iTunes, to good ole terrestrial radio, there are a lot of ways to listen to music today.

But, believe it or not, there is one area that still has yet to be exploited. It's what you listen to as you tool down the road.

Major players such as Google, Apple and Pandora are making inroads into this area, but the truth is that Sirius XM Radio (NASDAQ: SIRI) has a "built in" head start.

Its equipment is already installed in approximately 52 million vehicles. Better yet, Sirius expects that number to almost double, reaching 100 million vehicles within the next five years.

That doesn't necessarily sound like "dead money" to me - despite the chorus of analysts who had written the company off.

In fact, Sirius has seen its share price rise from $0.10 (that's right, 10 cents) in early 2009 to a five-year high of over $3.50. That's a gain of 3,400%.

The question now is whether it's too late for investors to tune in....

The Sirius XM Radio Story

Sirius XM is a subscription-based service that currently offers music as well as exclusive shows and content. The company boasts 24.4 million subscribers, which represents an increase of 19% over the last two years.

And while Sirius' factory-installed receivers give the company a built in advantage (two thirds of all new cars purchased today are Sirius-equipped), converting them into paid subscribers is where the rubber meets the road.

To that end, auto retailers usually include trial promotions that allow the new-car buyer to listen to Sirius for 90 days. Once the trial runs out, Sirius is able to convert about 44% of the new-car buyers into paid subscribers. Sirius management considers this number to be quite healthy.

With both Ford and GM showing double-digit percentage sales increases in April, sales of subscriptions were bound to follow suit.

Even still, when Sirius reported its first quarter earnings on April 30th, the company came up short, missing analysts' expectations by a penny.

However, the miss didn't deter the upward momentum of the share price, which is up over 8% since the earnings release. Obviously there is more than just the cold hard numbers driving this upward momentum.

It's easy to see why - as goes the auto industry, so goes Sirius.

In the first quarter Sirius added 452,890 new subscribers (up 12% from the first quarter results a year ago) and is well on its way to reaching -- or even surpassing -- its goal of 1.4 million new subscribers by the end of the year.

The key, though, is that Sirius is not just resigning itself to the new-car market.

The company also has high aspirations for the used-car market as well.

Sirius is offering used-car buyers free trial subscriptions through over 9,000 participating used-car dealers and aims to continue to build its network of dealers over time. What is surprising is that Sirius was able to double the amount of dealers within a year.

But it's still too early to tell how many used-car owners will convert from a trial to full subscription. Obviously, the conversion rates won't be nearly as high as that for new-car buyers and their additional discretionary income.

However, don't forget that the cost of the equipment has already been expensed at the time of the original purchase -- which makes the used-car subscriber a very profitable customer for Sirius.

Sirius Puts Nickels In Its Own Jukebox

At the moment, Sirius' biggest investor is Sirius itself.

The company is in the midst of a share repurchase program that will reduce its massive 6.4 billion of outstanding shares. The theory is that with fewer shares outstanding, the higher the amount of earnings per share -- which should translate into a higher stock price.

The company has allotted $2 billion towards its buyback program and has thus far bought nearly $650 million worth, or 209 million shares.

While 209 million may sound like small potatoes in the grand scheme of things, take note that Liberty Media (Nasdaq: LMCA) is the owner of just over 50% of Sirius XM. So, in effect, the buyback is disproportionately reducing the amount of shares available to the retail public.

That's good news for the retail investor.

Sirius XM also has an enormous free-cash flow. With an average monthly subscription priced at approximately $15, nearly 70% ends up as free-cash flow. A portion of this cash could, and probably will, be used for further share repurchases.

A further signal that Sirius may accelerate share buybacks is that it is taking advantage of the very low interest rate environment by issuing $1 billion in notes. A chunk of this new cash will go to repaying higher debt obligations, but the remainder is more than likely to be used for additional buybacks.

Sirius Streaming Online

For another $3.50 per month, Sirius also wants to help you to continue to listen on all your Internet-enabled devices.

Competitor Pandora has already paved the way in this area. Now the giants are getting into the act. Google just announced its entrance into the Internet radio market while Apple is rumored to be making a similar announcement at its Worldwide Developers Conference in mid-June.

How it all pans out will be interesting to watch. But Sirius is no slouch when it comes to the Internet. The company has recently debuted mySXM in order to personalize the listener experience, much like what Pandora does, and looks to add more special features down the road.

Also, let's not forget that another way Sirius sets itself apart from the rest is by offering exclusive content.

The company recently announced that it will launch two new channels, Entertainment Weekly Radio and Comedy Central Radio - two very prominent names in the entertainment industry.

Plus, it still has the ever-popular personality, Howard Stern, who attracts over 12 million listeners per week.

Buy Sirius Even With Some "Static"

Of course, in today's stock market environment, most investors are a bit leery of buying near the highs. On top of that, Sirius is what many would consider a discretionary item, which is at odds with a Money Morning mantra that says to buy companies that give people what they need over what they want.

However, if you look at Sirius - the company "wants" to buyback a lot of shares, and I'm on board with that philosophy.

Also, if the new-car market continues to show strength, then that is another strong catalyst for Sirius.

All things considered, that makes me a BUYER of Sirius XM Radio.

[Editor's Note: If you have a stock you would like to see us analyze in a future issue, leave us a note in the comments below and we'll add it to our list.]

About the Author: David Mamos brings nearly 15 years of analytical experience to the table with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation and execution of trading strategies for aggressive investors.

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