mongo-looking.jpgIt seems that a day does not go by where an article with bad information, or bad assumptions regarding Sirius XM radio is published. Writers have opinions, and that is perfectly fine whether they are positive or negative opinions. However, those opinions should be grounded in some aspect of reality.'s Scott Moritz published an article highlighting five equities that he feels may not survive another downturn. Sirius XM Radio was listed among these five equities. The fact that Sirius XM has had troubling times is not news to anyone, and the possibility exists that the company may have difficulties if there is another downturn. However, I disagree with the reasons outlined by Moritz.

In his article Moritz states:

"Tech's hottest cash fire has finally reduced its stock to embers. The satellite radio shop has plunged deeply into red ink, accumulating a total deficit of $9.46 billion. Given that Sirius shares are trading at around 40 cents, it's obvious that investors aren't confident that pay radio stock has much upside. Sirius lost customers for the first time ever in the first quarter and is on track to lose 1.6 million subscribers this year. Free cash flow for the first quarter was a negative $4 million. With so much riding on new car sales, Sirius faces big challenges this year.

A likely scenario is that Sirius will collapse into the arms of its lifeline creditor and big debt holder Liberty Media (LMDIA Quote), owner of DirecTV (DTV Quote).

With friends like Liberty Media waiting in the wings, Sirius equity holders have reason to worry."

Let's look at Moritz's reasoning in layman's terms. Moritz lists as a concern the fact that Sirius XM has an accumulated deficit of $9.46 Billion. This is true, but what does that have to do with anything at this point? The number represents the total losses of the company for the length of its existence. If Sirius XM were to make $1 Billion in profits this year, the accumulated deficit would go down to $8.46 Billion. Thus, a company could still be showing a negative accumulated deficit even though their business model has turned the corner. Moritz would have been better off speaking of the debt Sirius XM currently has. That number is $3 Billion. It is the current debt that would impact the company if there was another downturn. Past debt would not matter at all.

Next Moritz deals with the stock price and investor confidence. He states that the current stock price demonstrates that investors are not confident in the company. While this certainly may be true, investor confidence is not a determining factor of a company making it through another downturn. With their debt staved off for a few years, the company is actually well positioned to ride out the storm, and perhaps another downturn.

Moritz then deals with the subscriber count, and states that the company is on a pace to lose 1.6 million subscribers this year. While a number such as that is possible, the trend created has more to do with promotional subscribers than anything else. The financial metrics of the company actually show that the slowdown in the promotional subscriber category becomes a cost saver for the company. Most OEM promotional subscribers have to become self paying subscribers for a year before that sub actually sends dollars to the bottom line. It is likely that the Sirius XM will demonstrate on their balance sheet that they no longer require massive influx of promotional subs in order to be a viable. The company is shifting to smarter growth, and less expensive growth.

The last statement by Moritz is perhaps his biggest error in my opinion. He states that investors should be concerned because of Liberty Media, and that Liberty Media is Sirius XM's largest debt holder. How is it that Moritz missed the fact that Liberty is also Sirius XM's largest equity holder? Liberty Media actually gives the company MORE stability, and investors MORE security. Because Liberty holds such a valuable stake in the company, they will want to protect it. The upside for Liberty on the equity side has already delivered more potential than the interest on the debt. Liberty has every reason to want the company to be a success, and because of their 40% stake in the stock, every reason to be aligned with shareholders, and every reason to ensure that the equity does well. In actuality, having Liberty waiting in the wings should cause confidence, and not worry as is the opinion of Mr. Moritz.

Simply stated, Moritz may feel strongly that Sirius XM would have trouble with another downturn, but the reasoning he lays out seems fraught with error. The question is whether Mr. Moritz would have a change of opinion if he were to look at the facts more clearly, or perhaps from other angles. Historical debt does not matter, it is present and future debt that matters. Subscribers cost the company money, and the company needs to act with prudence while car sales are low. Liberty holds the largest stake in the equity. They hold debt as well, but the equity is likely the more valuable piece of this deal for Liberty. I am not saying that there are not concerns with this equity, because there are. However, a deeper understanding of the equity is required so that someones concerns are built on a solid thought process.

Position - Long Sirius XM Radio