Key Season for Satellite Radio at Hand

After a very tough year, satellite-radio stocks finally look destined to head higher. Additional subscribers, better management and improved cash flow are just some of the factors that should boost both major players in the months ahead.

Shares of XM Satellite Radio (XMSR - commentary - Cramer's Take) and Sirius (SIRI - commentary - Cramer's Take) sustained some losses last month, as volume built up and the stocks fell under pressure.

Part of this can be attributed to mutual fund managers, as their tax year usually ends in October. Those managers with losses were selling holdings in satellite-radio stocks to offset gains from other holdings. That way, they could minimize the tax burden on their shareholders.

XM's Troubles

Even aside from tax-season selling, though, XM has endured its fair share of struggles. Former Director Pierce Roberts made a noisy exit from the board earlier this year, citing disagreements with the company over balance-sheet and general-management issues. Then, despite what should have been a strong summer selling season for XM when Major League Baseball is on the air, sales fell disappointingly short.

During the summer quarter, XM was also hurt by an FCC order to stop selling certain radios that were causing interference with terrestrial radio if tuned to the wrong frequencies.

Plus, factory-installed car receivers are a big contributor to XM's sales, and General Motors (GM - commentary - Cramer's Take) is its lead customer. GM's troubles certainly didn't boost XM; the automaker's North American vehicle production output continues to be cut back.

Nevertheless, things seem to be looking up for XM now. When the company reported third-quarter results on Nov. 6, it was the first time this year that management did not lower guidance for year-end subscribers.

Source: Company reports

On July 24, XM named Nate Davis as president and chief operating officer. This was a smart move, as Davis did good things during his stint at Nextel, and improvement is already visible at XM. XM is now starting to be run like a more properly managed business, with cost controls firmly in place.

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At the time of publication, Lappin was long Sirius, although holdings can change at any time.

Joan Lappin, CFA, is chairman and chief investment officer of Gramercy Capital Management Corp., a registered investment advisor based in New York City, which she founded in 1986. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Lappin appreciates your feedback; click here to send her an email.