Editor's Note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on
. He's also a regular contributor to
subscription site. If you'd like to see all of Jon Markman's
commentary, click here for information about a free trial.
Each new day seems to bring once-highflying stocks back down to earth. One of the most gravitationally challenged is
Sirius Satellite Radio
, whose market value has tumbled 36% since the start of a year in which it was supposed to be launched on its path to glory.
Last week, Sirius beamed out word that it had added 305,437 subscribers during the first quarter, a huge leap over the 90,602 added in the same period a year ago. That brings its total number of subscribers to 1.45 million through the end of March. It said revenue rose fourfold to $43.2 million in the quarter, from $9.3 million last year. And it lifted guidance for the full year, stating that it expected to conclude its 2005 campaign with 2.7 million subscribers, a couple hundred thousand more than its prior estimate.
In prior times, a quadrupling of subs and a boost in estimates would have catalyzed a big move up. But it appears investors are finally getting wise to the satellite-radio scheme. This time, Sirius' promises elicited a big yawn. Shares remained beneath the critical $5 level that tends to distinguish investment-grade issues from speculative ones, far off their $9.45 peak late last year. Even when the rest of the market rallied on Friday, shares of Sirius barely budged.
No Longer Impressing Investors
The problem at Sirius is that earnings continue to be far more elusive than revenue, and investors are no longer impressed with its tiresome showcase deals for talent. In the most recent quarter, the company lost $193.6 million, which compared unfavorably with a loss of $144.1 million in the same period a year ago. And for the entire year, the company now forecasts a loss of $510 million, deeper than its previous guidance of a $480 million loss.
Yes, Sirius now contemplates losing half a billion dollars this year despite seeing decent subscriber growth. And the reason, as it explains deep in its press release, is "increased subscriber acquisition costs to support higher gross subscriber additions." In other words, the more subscribers it gets, the more money it will lose. Nice business.
Hot Deals, Burning Money
Of course, Sirius doesn't just lose money -- it ingests it. In March, the company announced a $250 million issuance of senior notes. Some of the money was earmarked for the refinancing, at lower rates, of two smaller issues with coupons of 14.5% and 15%, but about $187 million was headed toward the company's cash hoard, which totaled $754 million at the end of last year. It says it needs the money to underwrite its business plan until becoming free cash flow positive in 2007, which only really means a sucker is born every minute.
Sirius finds itself in this fix because it insists on wildly overpaying for content with the money snookered from investors, offering $100 million annually to shock jock Howard Stern for five years starting in 2006. Add to that the deal for $188 million in cash, 15 million shares and warrants for an additional 50 million shares with the National Football League for seven years of exclusive broadcast rights.
These deals have garnered Sirius publicity, but the numbers for the latter in particular just don't pencil out financially or intellectually. People use satellite radio in their weekday commute to avoid commercials -- not to listen to some other city's football games on a Sunday when there is a far better alternative called
The folks who judge bond issues at Standard & Poor's have studied the Stern and football deals and estimate that while they could lift Sirius' subscriber count to 6.7 million by the end of 2006, cash flow break-even is a 2008 event at best. Conventional losses are still on the horizon as far as the eye can see.
Losing Ground to Rivals
Someone needs to remind investors in this company that the radio industry isn't exactly a growth business that's spawning a lot of millionaires.
Clear Channel Communications
, the largest radio conglomerate in the Western Hemisphere, has shed 64% of its value since 2000, and losses at radio unit Infinity recently led
to take a whopping $10.9 billion charge against earnings.
Moreover, Sirius (a holding in
), isn't even the best satellite-based business model out there, as it continues to lose ground to rival
XM Satellite Radio
( XMSR), which has more than twice as many subscribers, or around 3.8 million.
So why is the company still valued more like a cure for blindness, cancer and bad breath -- sporting an otherworldly price-to-sales multiple of 95, or eight times more than the incredibly profitable online retailer
and even three times more than the demonstrably more successful and responsible XM Satellite? Good question, since its future is primarily now tied to one of the scariest industries on the planet, and that is U.S. automobile makers.
The one thing that XM has going for it is active marketing support and a factory installation deal from its partner and major shareholder,
. Sirius, in contrast, has depended on
, which has so far failed to fulfill hopes that it would provide factory installation of its radios as a standard option.
Indeed, Sirius has decided to spend madly on content, specifically in an attempt to overcome the handicap of having a less-capable partner. Fans of the company note that Ford offers Sirius radios as a dealer option in much of its line, but they don't seem to understand that until satellite radio becomes a standard factory option across the entire line, it will never reach its goal of achieving mass-media status.
A Concept Losing Its Appeal
Meanwhile, the economy and technology do not stand still. A $12.95 monthly subscription may sound reasonable to early adopters of gizmos in an expanding economy -- as the country enjoyed in 2003 and 2004 when Sirius optimism was rising -- but during a time of diminishing economic growth, stagnant job and wage growth and rising energy prices, that's an expenditure that can be indefinitely postponed so long as a free alternative remains available. And at the same time, wireless-phone carriers and makers of MP3 players are homing in on their own ways to provide uninterrupted, narrow-niche music streams.
Back in November, investors were drawn to the idea when it was learned that new Chief Executive Mel Karmazin bought 1.5 million shares at $5.36. He's now 10% under water on that buy, while three longtime executives at the company, including Chairman Joe Clayton, late last month combined to dump one million shares at around $5.25.
Brokerages that drool over the possibility of getting Sirius' stock-and-bond underwriting business have slapped price targets ranging from $6 to $9 or more on the stock. But the much more objective and conservative analysts at Morningstar believe shares are worth no more than 50 cents. Giving the company an ever-so-slight benefit of the doubt on its grotesquely optimistic growth plans, I might contemplate buying the shares in the low- to mid-$3s as a speculation, even though, in some respects, it is worth less now than it was when it sold for that price a year ago because of dilutions from endless secondary stock sales and obligations to the NFL, Stern and Nascar that stretch well beyond visibility range.
In short, listen up: No matter how much you enjoy satellite radio in your car, this is still not a stock to buy in the $4s and $5s and stow away in your glove box. Wait for inevitable disappointments later in the year to knock it down, and then consider it only as a speculative buy.
At the time of publication, Markman had no positions in stocks mentioned in this column.
Jon D. Markman is publisher of
Stock Tactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at
email@example.com; put COMMENT in the subject line.