Like him or hate him, it is always prudent for investors to know what Jim Cramer is up to, and to understand where he stands on any equity you are invested in. If Cramer is on your side, that's fine, but if he is not...Look Out! Investors in Sirius XM Radio are likely very familiar with Jim Cramer and his connection with TheStreet.com. Over the years Cramer and TheStreet.com have seemed to be on the negative side of satellite radio, and some would say that their bear arguments have been so persistent that there must be an agenda.
Over the years I have heard more conspiracy theories satellite radio than almost any other equity. Some of these may have grains of truth, but as with most conspiracy theories, things do tend to get overblown. In the case of Cramer and TheStreet.com, whether they are publishing news with an agenda is a matter of opinion with strong evidence attributable to BOTH sides of the argument.
At this point I am sure that those that despise Cramer and TheStreet.com will want to have me hanged for even considering giving them the benefit of the doubt. Let's face it though, Sirius XM delivers clicks, and eye catching headlines deliver even more. There is no shortage of sites out there that write about Sirius XM simply to garner traffic. Often times, those that have been around the block for a while can see this rather quickly, while newer investors get fooled.
On April 22nd TheStreet.com published a video titled, "Sirius XM's Biggest Risks". Passionate Sirius XM investors immediately labeled the video as a bash piece. Today, April 25, 2010, the Street.com released the same piece yet again. This adds fuel to the conspiracy theory fire, and the timing, with 2 more days remaining to gain NASDAQ compliance makes their argument stronger...BUT...what was covered in the piece needs to be considered as well. I do feel that there was little need to recycle the news even though, beyond the title of the video, the piece did seem to at least have an attempt to be "balanced".
The piece starts out saying, "It is fairly safe to say that Sirius XM will not be delisted from the NASDAQ."
The piece seems to recognize that Sirius XM will gain compliance. My biggest issue with the piece is that what is labeled as the biggest risks by the analyst seem to be misunderstood by him, and additionally, they do not supply the viewer with enough information to substantiate their opinion of the risks.
The Risks According To TheStreet:
1. The Debt Load. Debt is not good or bad. Debt is debt. The fact of the matter is that debt can be good. Smart debt is controllable and manageable. With Sirius XM Radio, they do indeed have substantial debt. The picture is better now than it was in the past. The company has made a series of moves that extended out the debt, and has refinanced a lot of debt at substantially lower interest rates. For a company that was knocking on the bankruptcy door only a year ago, the debt picture for Sirius XM is in fantastic shape.
The analyst notes that interest expense for 2010 will be $214, and 2011 will bear $308 million. What is shown, but not mentioned is that 2012 will be $294 million, 2013 is at $265 million, 2014 lowers again to $134 million, and only $60 million in interest is scheduled for 2015. While the numbers are big, the analyst does not note anything about how manageable this debt is. He does not discuss revenue at all, nor does he note the huge safety net Sirius XM has with Liberty Media, which controls 40% of the company, and is very unlikely to let the company falter.
The fact of the matter is that the debt load is under control and manageable. An uninformed viewer would have been scared away by the big numbers, but will have turned away without all of the information. In fairness, the debt picture is not perfect, but the company has been making huge strides in that department, and could well be in a position to make the debt picture look even better with each passing quarter. The days where the company can stop rolling debt should be fast approaching, and with those days this "Big Risk" will be mitigated.
2. The Competition The Company Faces. Is this a risk? Yes and no. Yes, the services such as Pandora and Slacker still exist, and likely will continue to exist. The question is whether Sirius XM is able to differentiate itself from these services. Interestingly, the analyst does not mention some of the challenges that services such as Pandora face, nor the revenue stream or subscriber numbers for these services. Some would argue that the viability of the competitors mentioned is much less than Sirius XM.
I do see Pandora, Slacker, and last FM as competition. These are great services that offer some things satellite radio can't or don't. I myself use Slacker, and sometimes even Pandora. The key here is that while I subscribe to all three services, there has been no substitute for the many positive aspects offered by Sirius XM. Thus, Slacker, Pandora, et-al have not been successful in getting me to cancel a satellite radio subscription. Music can be had from many sources, but UNIQUE content, such as what we get on Sirius XM, is something people will pay for. Talk channels, news, and special run channels are worth the subscription, and many people feel the same. Over 45% of those exposed to satellite radio through the OEM channel make the choice to become self paying subscribers. certainly these numbers make Sirius XM very viable.
As far as this being one of the three biggest risks...If competition from Pandora is one of the top three risks, look at it as a good thing. Pandora will always be around, but they have yet to develop a solution that makes people cancel their satellite subscription. The reason is UNIQUE CONTENT.
3. Churn. What this analyst lists as a major concern is actually well under control. This section of the video simply makes me think that the analyst does not fully understand satellite radio. Comparing churn in satellite radio to a satellite television service and a cell carrier is a mistake that simply should not be made for MANY reasons.
First, satellite television and cell carriers contract their subscribers and have substantial penalties for leaving the service early. Secondly, television and cellular phones are seen as much more of a necessity than satellite radio, which is seen as more of a luxury. Satellite television and cellular companies usually have an equipment charge hanging over the head of the consumer. That $400 phone that you got for free came with you agreeing to stay with that service for two years. These are very real reasons why other subscription service appear to have better churn numbers.
An analyst that understands satellite radio recognizes the dynamics of the service, and what represents good churn numbers. Sirius XM's churn at 2% is acually good, and hardly a big risk at this point. Churn does become a risk at 2.2%. The company is building subscribers in numbers greater than expected with churn at 2%. The analyst failed to mention this. The analyst also failed to mention that the company expects churn to decrease over the course of the year. This can be accomplished because the company knows they have some latitude in making that happen. Want proof? Q1 has traditionally been the worst quarter of the year for churn. Churn is always higher in Q1. Somehow though, the company held the line at 2% this year. If you understand Sirius XM, you will know that this bodes well going forward, and thus another of the "biggest risks" has been mitigated.
Bottom line on this "risk" is that churn is stable and well under control.
So why did I write about this now and not when it was originally released? When it was originally released, it was essentially a non-event, and frankly just another among many uninformed or misinformed opinions about satellite radio that we see from many sources. When they decided to recycle the piece, they seemed to be asking for more attention. Now they have it.
In fairness, the piece does offer some balance talking about lower SAC, better ARPU, and other metrics. I do not mean to pick on the analyst, and shy of their recycling efforts, would not have bothered. The guest analyst on the piece likely does have a decent grasp from a cursory standpoint, but does not follow satellite radio to the depth that others do. This shows in the piece.
In fairness to passionate satellite radio fans, there is nothing worse than bad or inaccurate reporting hitting the wires. I can understand your frustration.
Position - Long Sirius XM Radio