Satellite Radio Stock Is Under $10 and Seems Ready to Rise

Matt Thalman

Sirius XM

Recent hurricanes not only are increasing vehicle replacements but also potential new subscribers for satellite radio.

The damage from Hurricanes Harvey and Irma appear to be putting people in new cars faster than they would have without the storms. This is good news for a satellite radio company called Sirius XM (NASDAQ:SIRI), which is trading under $10 a share.

Sirius XM should see an increase in the coming quarters among both trial subscribers and converted users due to the hurricane-related replacement of destroyed vehicles with new ones. It already may be starting to happen, as new vehicle sales surged last month.

Nearly all of those new vehicles will come equipped with factory-installed Sirius XM radios and antennas. Buyers of those vehicles receive a free trial as Sirius XM officials seek to convert them into paying customers when the introductory period ends.

Why should investors care about these additional prospective customers for Sirius XM?

First, Sirius  XM has had an average new vehicle consumer conversion rate of 40% during the past two years. If the company can sustain that conversion rate, it could increase its customer base by 7.42 million this year, based on a 40% conversion rate of the 18.57 million cars estimated to be sold in the United States in 2017. Furthermore the company’s churn rate is just 1.8%, which is another great indication that Sirius XM and its programming do a good job keeping customers happy once they sign up.

Second, Sirius XM is already a free cash flow positive company, producing $1.5 billion in the past year. The company has provided 23 consecutive quarters of positive earnings and revenue has increased every year. Sirius XM already pays a small dividend, and the company has been aggressively buying back stock over the last few years.

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While the Sirius XM financials look good today, the company’s performance could improve significantly if the number of subscribers grows just modestly. The reason is the limited incremental cost to serve those who agree to pay for satellite radio after doing so during the free trial period. After all, the antenna and related equipment already is built into the new vehicles. When Sirius XM adds a new customer, its fixed costs of providing satellite service do not change much since the spacecraft and launch expenditures previously have been incurred.

Unlike satellite television, an installer does not need to drive the satellite radio equipment to someone’s home, spend time setting up a satellite dish and point the antenna toward an in-orbit spacecraft to receive broadcast signals. Thus, the standard unit cost of production that most manufacturing companies incur to build and sell cars, cell phones or almost any product does not apply to Sirius XM when it gains subscribers who bought new vehicles and opted to start paying for the service once their free trials ended.

As a result, Sirius XM produces a continuing stream of cash flow as its subscribers renew each year and use the antennas already embedded in their vehicles. In its latest quarterly report, Sirius XM announced that it had 32 million subscribers, with 26.7 million of them paying. The rest were on promotional trials. If over the next few years the company can convert just 25% of those on trials to become paying customers, it would bring aboard 4 million new customers each year. That goal seems well within reach, considering the company’s current 40% adoption rate.

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In my view, Sirius XM could produce a big bump in its share price in the near future.

Matt Thalman is a writer for www.stockinvestor.com. At the time of this writing, he did not own shares of any company mentioned. Follow him on Twitter at @mthalman5513.

 

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