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Should I Do It? Sirius

Michael Comeau

The recent decline in the share price of Sirius Satellite Radio(SIRI Quote) has brought its market capitalization below the $6 billion maximum, making the stock eligible for inclusion in the Breakout Stocks model portfolio. The stock was recently trading at $4.07.

Given that, I wanted to analyze this company for readers so they can get a better understanding of our research process, and answer the question: Should I buy shares in Sirius?

As most readers know, Sirius is one of the leading satellite radio providers, best known for its solid lineup of programming, including "The Howard Stern Show," NFL football, and "Martha Stewart Living." The company's main competitor is XM Satellite Radio(XMSR Quote).

Sirius has experienced very strong revenue growth as early adopters scooped up its service. The company generated $424 million in sales over the past 12 months, a massive gain from just $13 million in 2003 and $67 million in 2004. In addition, subscriber growth has been impressive, as the company had 4.7 million subscribers at the end of June, up from just 30,000 at the end of 2002.

However, it appears that this growth is slowing. While the company's revenue growth is impressive -- 188% in the most recent quarter year over year -- it has been steadily decelerating. In addition, despite the arrival of radio legend Howard Stern at the beginning of this year, Sirius had slower sequential growth in subscriber numbers relative to last year, despite Stern's huge popularity.

Simultaneously, Sirius has never had a single quarter of operating income or operating cash flow. And the losses have only gotten bigger as revenue has grown. In 2003, with just $13 million in revenue, Sirius had an operating loss of $313 million, and negative operating cash flow of minus $285 million. Over the past 12 months, Sirius lost $1.14 billion from operations and burned $362 million in operating cash flow, despite $424 million in revenue.

In addition, Sirius has numerous obstacles on the horizon. The first is the Apple(AAPL Quote) iPod, the dominant MP3 player in the marketplace. Auto manufacturers and audio-equipment makers are rapidly putting iPod connections into cars, presenting direct competition to Sirius' music programming.

In addition, Howard Stern's $500 million, five-year contract has set the bar extremely high in terms of the cost of acquiring talent and content. Should Sirius want to contract with popular radio personalities like Rush Limbaugh, it will likely have to pay enormous sums, especially since traditional radio companies will probably join the bidding in order to keep talent.

And in any case, the cost of renewing Howard Stern's contract will be immense, assuming Stern will even want to stay with Sirius. By the next decade, most cars will have Internet access, and it is possible that Stern could simply stream his show over the Web on his own.

But even companies with the poorest fundamentals and competitive positioning can be a buy when a stock is cheap enough. But Sirius is far from cheap. Because the company is nowhere near reporting anything resembling a profit, sales-based ratios must be used. Sirius is trading at nearly 10 times 2006 sales, which is an outsized number suited to profitable companies with strong profit margins. In other words, the stock is trading at an expensive multiple, especially given that Sirius has no earnings. And the company has zero chance of reporting a profit this year.

So should Sirius be bought? I actually believe Sirius can rally in a strong market should stocks extend their recent rally, but as a long-term investment, I have to give Sirius the thumbs down.

Generally speaking, the latest names added to Breakout Stocks have been reasonably-priced stocks with strong financial positions and unique product and/or service offerings. In addition, for the Breakout Stocks model portfolio, I am emphasizing stocks with some type of secular growth component that can withstand a moderate economic slowdown. So while Sirius can bounce from here, it simply doesn't fit the requirements of what I am seeking in new positions.