The stock was close to dead at the start of 2009. Wallowing in the penny stock nether land of under $0.05 per share, this company was all but delisted during these dark days. In fact, it was on the Nasdaq's watch list for delisting despite being among the exchange's most active name at the time. And while facing stiff competition from upstart Internet-based services, this company has battled back from the brink and is setting up to be a solid investment right now.
In case you haven't guessed it, I am talking about Sirius XM Holdings (SIRI). Truth be told, I am a diehard Pandora (NYSE: P) user when it comes to alternative radio sources. In fact, I have written several articles on how much I like Pandora as a service and an investment.
However, I recently purchased a new vehicle that came with a free 90-day trial of Sirius radio, and I was impressed. While Pandora can get stale with only music you like and similar being played, Sirius sounded fresh and new. There is something to be said for listening to the wide variety of programming Sirius provides such as music, comedy, sports and interesting talk shows. To put it bluntly, Sirius takes the crown when it comes to variety, making Pandora look like a one-trick pony.
This experience with the free Sirius trial triggered my interest in looking at the company as a potential investment. Here's what I discovered.
Sirius was saved back in 2009 by a $500-million-plus capital infusion from Liberty Media. These funds were structured in exchange for 12.5 million of preferred shares convertible to 40% of the common shares. Liberty must be thrilled with their investing acumen as Sirius has risen from its ashes.
In the third quarter of 2013, the company posted record revenue of over $962 million, adjusted margin of nearly 31% and a 26% increase in free cash flow. These numbers are impressive, and the future guidance is even more compelling. Sirius is expecting 34.5% of adjusted EBITDA margin in the fourth quarter and subscribers are slated to increase by 1.5 million by the end of the year.
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Roughly 70% of new cars now come with Sirius pre-installed. This penetration into the new car market will help the company on a variety of fronts.
First, many users who try the service will be impressed enough to purchase a subscription. Secondly, having Sirius capabilities built into new vehicles assures that the next generation of used cars will have the same capacity. This provides the very real potential of the used car buyer becoming a Sirius subscriber.
Additionally, Sirius has been randomly activating inactive radios so that the owners can sample the service. This is a brilliant marketing ploy that creates subscribers with very little cost as the radios already exists.
Sirius still faces stiff competition from the Internet radio sources such as Pandora. In addition, General Motor's (GM) OnStar service has a variety of entertainment choices in the works. Not to mention, Ford's (NYSE: F) Sync and Livio services, as well as Toyota's (TM) Safety Connect and Entune multimedia entertainment system, may all eventually be Sirius competitors.
Regardless, it's important to keep in mind that Sirius has a major advantage in that it has exclusive, long-term, contracted programs that cannot be replicated.
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Looking at the technical picture, the weekly price chart indicates a slow, grinding uptrend from October 2011 until it hit $4 in October 2013. SIRI has since fallen back to just above the 50-week simple moving average in the $3.50 range, where it has consolidated.
The great results in the third quarter combined with the projected growth should knock the price out of the consolidation to resume the uptrend.
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Recommended Trade Setup:
-- Buy SIRI between $3.50 and $3.80
-- Set stop-loss at $2.83
-- Set initial price target at $7.34 for a potential 93%-110% gain in six months