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Over the years, I have frequently been asked by friends, colleagues, and acquaintances to weigh in on their portfolios. And I can't tell you how often Sirius or XM (prior to the merger) cropped up as a holding. Typically, the reasons for purchase were the same: Someone subscribed to the product, either in their car, or at home, or both, and was blown away by what these companies were providing. They equated a great and somewhat addictive product that would take world by storm with a boatload of money to be made by buying the stock. Now, I can't completely fault this logic -- I've been guilty of it myself -- but it does show that there's often a great disconnect between what is seen as a must-have product and a must-have stock.
For me, the numbers just don't add up. While
has shown improvement in the top line and has generated operating earnings the past two quarters, the fact remains that this company is swimming in debt. Now, that's not surprising, given the capital-intensive nature of such a business, but it's still a huge hurdle that might ultimately be this company's undoing. That's not to say that satellite radio is not a legitimate business; I just don't see how Sirius XM will ever consistently make money.
Granted, last quarter's results may have been encouraging; as Sirius XM losses narrowed to $149 million, excluding one-time items, the company came very close to breaking even. But the level of debt is also increasing, and the burden of the swelling interest expense makes me queasy about the longer-term prospects for this company.
Sirius XM ended the third quarter with $286 million in short-term debt, $3.03 billion in long-term debt and $542 million in cash, giving net debt of $2.77 billion, up slightly from the second quarter's $2.72 billion. The interest expense was nearly $96 million in the third quarter, up from about $66 million in Q2.
The company did dodge a bullet last February, when
essentially saved it from bankruptcy by loaning it $530 million, helping it to pay off some looming debt. The price was huge though. Sirius issued Liberty 12.5 million shares of preferred stock, which is convertible into 40% of Sirius common stock.
Another issue for Sirius-XM is the fact that it has a massive amount of shares outstanding: 3.859 billion as of October 31. It's very difficult to show meaningful earnings per share (if the company can indeed ever get to profitability) when you have so many shares out. With a stock price below $1.00, the company may have to institute a reverse stock split anyway, and I expect this to happen in the coming months.
I'm the first to admit, that as a deep value investor, I sometimes buy rather ugly-looking companies because I see undervalued assets, a business that will turnaround, or both. I don't see either in Sirius-XM. That's not to say that there's not money to be made here in terms of trading the stock, there certainly might be. That's just not my bag.
At the time of publication, Heller had no positions in the stocks mentioned.
Jonathan Heller, CFA, is president of KEJ Financial Advisors, a fee-only financial planning he recently launched. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.
Jon is also the founder of the
, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.