We downgrade our recommendation on SIRIUS XM Radio Inc. (SIRI) to Underperform. The company reported mixed financial results for the fourth quarter of 2012. While net earnings barely met the Zacks Consensus Estimate, revenue fell below the same.
Why the Downgrade?
SIRIUS XM forecasted that its growth rate of net subscriber addition will be reduced in 2013. The company added more than 1.66 million Self-Pay subscribers in 2012. However, it is not expected to add more than 1.6 million Self-Pay subscribers in 2013. Similarly, SIRIUS XM generated more than 2 million net new subscribers in 2012, whereas the company is likely to add a mere 1.4 million net new subscribers in 2013.
Meanwhile, the stock price of SIRIUS XM has soared by more than 73% in the last year and is currently trading at the high-end of its 52-week price range. We believe that the company’s growth rate will slow down in 2013 and consequently its valuation metrics should converge to the S&P 500. SIRIUS XM currently has a Zacks Rank #5 (Strong Sell).
SIRIUS XM is largely dependent on the growth of the U.S. auto industry and at present holds an estimated 70% market share of the new cars sold in the face of growing competition from Pandora Media Inc. (P) and Spotify. Therefore, even a minor fluctuation of autosales may significantly affect the company’s overall financials.
Further, SIRIUS XM lost the legal battle to counter the takeover bid from Liberty Media Corp. (LMCA), which currently controlsmore than 50% of the company. We do not know whether there will be any change in management policy after the takeover.
We believe that the new deal with the company’s major customer, General Motors Co. (GM), may force SIRIUS XM to lose some paid promotional customers as according to the new arrangement, the auto giant has stopped the payment of promotional money to the company. In the reported quarter, the growth rate of net subscriber addition dropped 1.5% year over year.
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