Tags: Best Stocks 2012 ,Best Stocks To Buy In 2012 ,Best Stocks To Invest In ,Brazil stocks suffer weekly loss on growth fears
By Brandon Matthews
When it comes to Sirius XM Radio (SIRI), it can seem like a no win situation for its shareholders. When subscriber growth slowed due to the recession, doom and gloom forecasters came out of the woodwork like the cockroaches they are, claiming that the Satellite Radio “fad” had passed. Now that the company is re-establishing a subscriber base that is growing faster than analysts have projected, these same cockroaches decree that the increase in added subscribers will cut into operating profits as revenue share, royalties and expenses increase.
Sirius XM has an ace up its sleeve that is being completely overlooked for the most part by Wall Street. Assumptions are being made based on Sirius XM’s current financial picture, with one very important future fact being ignored. It is in this one simple fact, that Sirius XM investors can hang their hats on and sleep easy at night, despite the apparent manipulation that goes on from day to day. It is the one fact that cannot be changed and the one fact that should silence any criticism of Sirius XM. It is the answer to doubts surrounding Sirius XM’s debt profile. It is the answer to all doubts regarding Sirius XM’s ability to generate higher earnings, increase its positive free cash flow, and avoid any future debt crises.
This ace can be found in a single line item that is about to improve dramatically in the coming quarters, known as CAPEX or capital expenditures. CAPEX is about to take a steep nosedive next quarter and improve by over 200 million dollars next year as compared to current analyst forecasts. As a reminder, during the first quarter conference call, Sirius XM CEO Mel Karmazin stated:
Importantly, strong cash generation ultimately provides the company an opportunity to reward shareholders over time. Given the nature of the business and the diminishing near-term demand on our cash driven by lower CapEx and lower interest expense as we reduce debt over time it wouldn’t be unreasonable to expect an increase in shareholder value simply from de-leveraging our balance sheet.
Sirius XM CFO David Frear added:
As a reminder we expect to spend approximately $212 million on satellite capital expenditures this year as we launch the already completed XM 5 satellite in the fourth quarter and continue building the SIRIUS 6 program. Next year we anticipate we will spend approximately $111 million on satellite CapEx as we launch SIRIUS 6 later in the year. These amounts are in addition to the $50-60 million of annual ground based maintenance CapEx that would be typical.
As we complete the replacement cycle of both constellations in 2011 we expect satellite CapEx to be deminimous for several years beginning in 2012. This means we will have a roughly $100 million improvement in our free cash flow in 2011 from declining CapEx alone and another approximate $100 million improvement on top of that in 2012 again from lower CapEx.
Even more importantly, several analyst reports I have seen are basing their models on even higher CAPEX than Sirius XM has indicated, in many cases exceeding 300 million in the current year alone. This tells me that there is even more room for upward surprises on the fundamentals that the street simply is overlooking when evaluating both the debt and equity landscapes.
The more bearish comments I’ve seen, which denigrate Sirius XM’s better than expected subscriber growth, are also overlooking or ignoring the increases in top line revenue that will result.
With no near term debt, Sirius XM shares are selling at bargain basement prices. As revenue continues to grow at a rate that far surpasses any other media or radio company, and capital expenditures dwindle to little more than maintenance costs, Sirius XM’s cash position will improve greatly in the coming quarters, to the reward of its shareholders.
Disclosure: Long SIRI
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