Today, a look at a growth stock in the field of satellite radio. Radio’s ability to thrive against competition from movies, television and the Internet owes a good deal to its popularity among car drivers. Sirius XM Canada is taking full advantage of this trend as its satellite radio services are installed in an increasing number of vehicles. The company’s profits are up and its dividend yields a high 8.5%. In response to a question from a member of his Inner Circle, Pat examines the company’s financial situation and the competition it faces from traditional radio and new music streaming services.
Q: Hi, Pat: What is your opinion of Sirius XM Canada? Thanks.
A: Sirius XM Canada Holdings Inc. (symbol XSR on Toronto; www.siriusxm.ca) sells satellite radio services to 2.6 million Canadian subscribers.
The service includes up to 130 channels featuring a variety of musical genres, as well as stations devoted to news, sports, talk and entertainment. Most are commercial-free.
The company licenses these channels from U.S.-based Sirius XM Holdings (symbol SIRI on Nasdaq), which gives it access to exclusive content by Howard Stern, Disney, Oprah Winfrey and Comedy Central. Sirius XM also has a 24.97% voting stake in the Canadian firm.
Subscribers mainly access these channels through pre-installed radios in their vehicles. They can also buy aftermarket satellite radios for their cars and homes, and they can listen to programs on the Sirius XM website.
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Growth stocks: Satellite-equipped cars expected to rise by 1.2 million per year
In its fiscal 2015 third quarter, which ended May 31, 2015, Sirius XM Canada earned $8.0 million, or $0.06 a share. A year earlier, it lost $4.7 million, or $0.04 a share, but that was mainly due to $16.6 million of charges related to early debt repayment.
Revenue rose 11.6%, to $83.1 million from $74.5 million. The company added 105,470 subscribers, net of cancellations. Average revenue per user improved to $11.70 a month from $11.14.
Sirius XM Canada typically offers car buyers its satellite radio service for free, or at a low introductory rate, as part of their purchase. In the latest quarter, these users accounted for 30% of its subscriber base.
The company ended the quarter with cash of $23.8 million, or $0.16 a share. Its long-term debt of $195.9 million is a manageable 31% of its market cap.
The stock trades at 20.6 times Sirius XM Canada’s likely fiscal 2015 earnings of $0.24 a share. The quarterly dividend of $0.105 a share has a very high 8.5% annualized yield.
The company faces strong competition from traditional radio stations, particularly in cities, as well as streaming services like Apple Music and Spotify. However, it should benefit as more automakers pre-install satellite radios. There are now 6.0 million satellite-equipped cars in Canada, and the company expects that to rise by 1.2 million a year.
Inner Circle recommendation: HOLD
