NEW YORK (TheStreet) -- SiriusXM (SIRI), the federal government and college freshmen have a lot in common.
On Tuesday, July 15, SiriusXM announced the addition of $2 billion to its stock repurchase program, increasing its total buyback program to a staggering $6 billion.
According to SiriusXM's board of directors, the program was extended to "return value to the stockholders and its confidence in the long-term growth prospects of the company's business."
Is this a joke?
SiriusXM has been in extreme debt over a decade and nearly declared bankruptcy in 2009. Currently the company holds negative $2.2 billion dollars in net tangible assets. This means that SiriusXM has relatively insignificant tangible value compared to its motherload of debt.
Even more frightening, the company does not have enough current assets to keep up with its current liabilities. Out of its total $1.4 billion current assets, it has a paltry $121 million in cash; the majority is tied-up in receivables.
While $121 million in cash may seem substantial, when compared to its $2.8 billion in current liabilities, its cash balance is actually quite low. Imagine having a 4% cash balance compared to your own liabilities. It is akin to having $1,000 in the bank and $25,000 in credit card debt!
Although SiriusXM takes in more than $3 billion in annual revenue, its cost of goods sold and operating expenses eat up one-third of the revenue, while interest and taxes chew on the leftover revenue, leaving the company with less than 10% of its revenue as profit.
OK, so the company does come out with a bit of net income. What would a prudent company do in this situation? Pay off some more of that debt that eats into its revenue every quarter? Use it for revenue-generating activities?
Our college freshman instead believes that it is a better use of cash to buy back its own shares.
This makes no sense whatsoever.
It is not like the company's stock is trading cheap; it is trading at a 7.5 P/B ratio and a 60 P/E ratio! Considering the average stock market P/B is 2 and P/E is 15, anyone can see that SiriusXM shares are actually extremely overvalued; not undervalued at the slightest. This is the worst possible time to expand its share buyback program.
In my opinion, SiriusXM suffers the same disease as the federal government -- it takes its revenue stream for granted and spends wildly. There is no guarantee that demand for SiriusXM will always be there. As technology advances and more vehicles are outfitted with connection capabilities to Pandora (P), Spotify and their own mobile devices, the value of owning a satellite radio will diminish.
In conclusion, the stock market is reaching new valuation highs these days, and SiriusXM is leading the charge.
SiriusXM should notify its shareholders that it is pausing the share buyback program and instead using its cash to pay off debt that is costing the company more than $200 million in annual interest.
That is called prudent financial management and something from which many organizations could benefit.
-By Philip Farana of Predicting Society
At the time of publication Fanara held no positions in the companies mentioned in this article.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates SIRIUS XM HOLDINGS INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:
"We rate SIRIUS XM HOLDINGS INC (SIRI) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations and expanding profit margins. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Despite its growing revenue, the company underperformed as compared with the industry average of 14.6%. Since the same quarter one year prior, revenues rose by 11.2%. This growth in revenue does not appear to have trickled down to the company's bottom line, displaying stagnant earnings per share.
- Net operating cash flow has increased to $251.39 million or 48.82% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 5.49%.
- The gross profit margin for SIRIUS XM HOLDINGS INC is rather high; currently it is at 60.86%. Regardless of SIRI's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 9.42% trails the industry average.
- SIRIUS XM HOLDINGS INC reported flat earnings per share in the most recent quarter. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, SIRIUS XM HOLDINGS INC reported lower earnings of $0.06 versus $0.53 in the prior year. This year, the market expects an improvement in earnings ($0.08 versus $0.06).
- The change in net income from the same quarter one year ago has exceeded that of the Media industry average, but is less than that of the S&P 500. The net income has decreased by 23.9% when compared to the same quarter one year ago, dropping from $123.60 million to $93.99 million.
- You can view the full analysis from the report here: SIRI Ratings Report