On Dec 23, we maintained our Neutral recommendation on SIRIUS XM Radio Inc. (SIRI), as the company’s bottom and top line surpassed the Zacks Consensus Estimates but the top line missed the same in the recently concluded quarter.
Why the Reiteration?
SIRIUS XM is set to diversify its business model from a pure radio entertainment provider to a web-based safety and navigation information provider for cars. The company has decided to acquire the connected vehicle services unit of Agero Inc. The acquisition of the telematics business of Agero will enable SIRIUS XM to offer both satellite services and wireless services.
Furthermore, demand for light utility vehicles in the third quarter remains strong in the U.S. Penetration rate for new car sales in the reported quarter was 69% for SIRIUS XM, which is two basis points above the prior-year quarter. SIRIUS XM currently offers satellite-radio broadcasting services to nearly 24% of the cars in the U.S. The company extended its contract with Honda till 2020, which we believe will further drive the satellite radio business.
On the down side, SIRIUS XM is facing significant competition from several fronts. Pioneer System, a leading car information system manufacturer, unveiled a new car stereo called “AVIC-X920BT” that supports Internet radio. This product can detect Pandora Internet radio settings from iPhones or iPods, and can be translated into convenient access to create customized music stations for individual users while driving.
Even, Pandora has over 80 million registered users in the U.S. and provides a unique algorithm that increases the intrinsic quality of the music. In addition to iPhone, Pandora has also developed streaming services for BlackBerry and Android-based smartphones. Furthermore, the upcoming iTunes online radio service of Apple has become major threats for SIRIUS XM.
SIRIUS XM currently has a Zacks Rank #3 (Hold).
Other Stocks to Consider
Other TV/Radio broadcasters that also warrant a look include Salem Communications Corp. (SALM), Gray Television Inc. (GTN) and Discovery Communications, Inc. (DISCK). All three stocks currently carry a Zacks Rank #2 (Buy).