From time to time, we like to arbitrage the Barron's subscription wall, offering you free summaries of interesting articles in the weekend's Barron's magazine, taking advantage of the fact that we're a) free, and b) protected by law to bring you fair use summaries and clips.
This weekend's cover story was on the ongoing Sirius vs. XM battle and title 'Don't Bet On Howard'. Here's a clip:
Here's why XM looks more attractive than Sirius:
XM and Sirius have market values that aren't too far apart, but XM has almost double the number of subscribers. XM is likely to maintain its lead in the coming years because it has a stronger stable of automotive partners than Sirius, including all of the major Japanese car makers, starting in 2007. XM's partners control about 60% of the U.S. auto market.
"It's a significant disappointment to us that our market cap is lower than that of our competitor," says Gary Parsons, XM's chairman. "We have more subscribers, and we add them at a fraction of the cost." XM's cost per acquiring a subscriber is roughly $100, versus about $200 for Sirius, although Sirius aims to bring down those costs. "Investors at this point don't seem to be valuing that we're twice as large and twice as efficient" as Sirius, Parsons says.
The similar market values of Sirius and XM could reflect the momentum that Sirius received from the Howard Stern launch and the vastly different shareholder bases of the two companies. XM is the institutional favorite. Sirius counts a huge number of retail investors and limited institutional ownership. Sirius typically is one of the most active Nasdaq stocks, sometimes trading more than 100 million shares a day. Jim Cramer, the host of CNBC's Mad Money, has been a Sirius fan.
XM and Sirius have demonstrated that large numbers of Americans will pay for something that they used to get free. Both charge $12.95 a month or $142 a year for 125-plus channels of commercial-free music, news, talk and personalities like Stern. One misconception is that Sirius and XM share programming.
Looking ahead to 2010, a significant chunk of the estimated 17 million vehicles expected to be sold in the U.S. could have satellite radio as standard equipment. Both XM and Sirius may add three million subscribers annually in the next few years.
If you happen to be an investor in either of these companies, or are intrigued, it's probably worth the couple dollars to pick up a Barron's at the newsstand.
As we mentioned, back in December, blogger and manager Jeff Matthews also thought that XM looked superior:
Sirius has 1.3 billion shares outstanding, $1.1 billion debt and $900 million of cash, according to my Bloomberg. At $7.00 a share this yields and enterprise value of $9.3 billion.
That’s roughly $3,100 per subscriber based on Sirius’ stated forecast of hitting 3 million subscribers by the end of this month.
XM, meanwhile, has 222 million shares, $1.1 billion of debt and $750 million in cash, giving it an enterprise value of $7 billion at the recent $30 share price.
That’s $1,160 per subscriber based on the forecasted 6 million subscribers at year-end.
So, right now, Sirius—despite having a higher fixed cost base with the Howard Stern and NFL content deals, plus less desirable satellite coverage than XM (Sirius needs another satellite to ensure complete coverage in event of a failure)—trades at almost three-times the per-subscriber valuation of XM.Is a Sirius subscriber worth three-times an XM subscriber?
And, lest you think that XM vs. Sirius is the only game in town, Fred Wilson, last night reiterated his case for good ol' regular radio:
A little over a year ago, I proposed a hedged trade that I did not actually make.
I proposed going short Sirius and going long Clear Channel because I felt, through my involvement with iBiquity (I am an investor and board member), that HD Radio was going to get its act together and start to give the traditional radio broadcasters the tools to fight back against satellite, just as cable TV went digital and fought back against satellite television.
He then walks through the two companies valuations and adds:
So I like my chances on this hedged trade. It just seems that Sirius' valuation is hard to justify while Clear Channel's is pretty rational. Unless you think broadcast radio is going to have its lunch eaten by satellite. And I don't think that's going to happen.
Neither does Business Week which had a really good piece on the challenges facing satellite radio last week, which include a big broadcaster push on HD radio.
It will be interesting to see how things play out.
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