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Sirius XM's Risks Far Outweigh Rewards

Story updated with Sirius XM's earnings results

BOSTON ( TheStreet) -- Sirius XM (SIRI - Get Report) has a rabid fan and investor base. Its stock has advanced 71% in the past 12 months. But, it remains exceptionally dangerous because of its valuation and business model. The fact remains: Sirius XM Radio profits by selling an otherwise free service -- radio -- at a premium price. Although Sirius's subscription trend and technical momentum are strong, it may be wise to abandon this stock for safer pastures.

Sirius XM has more than 135 commercial-free music and talk stations and, now, more than 20 million subscribers, an impressive number. During 2010, the subscriber base grew 8%, sales advanced 14% and EBITDA, or earnings before interest, taxes, depreciation and amortization, jumped 35% as expenses were trimmed and sales grew. The fundamental progress at Sirius XM is undeniable. Its fourth-quarter operating margin widened from 13% to 18%. The cash balance jumped 53% to $587 million. But Sirius's quick ratio, a liquidity measure, remained poor at 0.3 and its debt-to-equity ratio, at more than 15, indicates excessive leverage. Risks abound.

Yet, Sirius continues to attract shareholders. Its stock, among the best-performing U.S. mid-caps of 2010, with a 173% return, is now expensive. Sirius trades at a forward-earnings multiple of 40 and a book-value multiple of 48, respective premiums of 59% and 1,160% to cable-and-satellite industry averages. For a company that hasn't yet demonstrated sustainable profitability, these premiums are a red flag. Sirius suffered an accumulated GAAP loss of $2.14 a share in 2008 and 15 cents in 2009. It broke even in fiscal 2010, but shareholders' equity climbed into positive territory as the float inched up 1.2%. During the fourth quarter, Sirius suffered an $81 million GAAP net loss, hurt by restructuring charges.

When dismissing one-time items, Sirius posted an adjusted fourth-quarter profit of 1 cent per share. But, its stock tumbled 7.9% in reaction to the report, released Feb. 15. It has since recovered, rising 22% in four weeks. Today, Sirius posted a per-share profit of a penny on revenue of $724 million, matching earnings expectations, but missing sales consensus.

The EBITDA and GAAP profit forecast have both been revised downward in the past four weeks, indicating an uptick in pessimism ahead of earnings. Given the current news-flow risks facing Sirius, it may be wise to avoid its stock until transparency prevails, following earnings.

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