Things aren't pretty in satellite radio.
Even as Sirius XM Radio (Nasdaq: SIRI) continues to gain subscribers and point to merger-related synergies, it's a hard sell on Wall Street. The company's stock begins the new trading week at $0.43 a share.
If there is any irony in the stock's erosion, it's that the bulls get more animated as the stock drops. Wait a few hours and you'll see the comment box below this article fill up with comments of readers incensed that The Motley Fool would dare bash their precious stock.
I am an adamant bull on the satellite radio medium -- though not necessarily the stock -- and I still get the venom.
"I'm no longer reading TMF," a typical comment may go. "You guys have been bashing Sirius for years."
There is never a "thank you for being right" or an "I wish I would've listened to you" after some of the sharper attacks on the company from my fellow Fools. I don't get it. Why are the befallen doing the taunting? We all make investing mistakes. They are inevitable. The key is to learn from them. Delusion will only make you poor.
Rather than fire up the bull or bear camps, I want to take an even-handed approach at the reasons why Sirius XM finds itself in its pocket change hole today. It's the best way of assessing if the company has what it takes to claw its way back out.
1. It's the shares outstanding
Sirius used to have a small count of shares outstanding. Then came its costly recapitalization efforts in 2003, followed by the necessary swallow of XM this summer. With more than 3 billion shares now, the company would have to command a market cap of $32 billion for its stock to break into the double digits.
Even DirecTV (NYSE: DTV) and Dish Network (Nasdaq: DISH) combined don't account for that kind of market cap, and satellite television is a higher-revenue product where both companies have been consistently profitable for years.
Trading in the single digits is a more realistic goal, but even then the industry will have to show that it's capable of generating consistent cash flow now that top-line growth is decelerating.
2. The FCC did it in
What stinks most about the FCC taking a year-and-a-half to approve the merger is where it dropped the newlyweds off: mere months from the first of three nine-figure debt repayment milestones.
Starting in February, Sirius XM has three huge refinancing hurdles to clear. This is like re-spawning in a video game, only to realize that you're starting again in a barrage of enemy fire. This is like getting pumped that your friends threw you a surprise party, only to find that the cake has been spiked with arsenic.
If Sirius and XM had been able to milk their deal synergies a year ago, the new entity would be much closer to turning consistently cash flow positive and appeasing its creditors.
3. It's a lousy time for automakers to go weak
If you think last week's market hit was bad, tell that to someone who invested only in domestic automakers. Shares of General Motors (NYSE: GM) and Ford (NYSE: F) shed roughly half of their value last week.
A sour economy is brutal to a big-ticket industry like car manufacturers. Even though relief is coming from pesky gasoline prices, drivers are delaying new car purchases and spending less time on the road.
That's a one-two punch for satellite radio. Fewer new cars being sold means fewer satellite receivers out there, since factory-installed systems remain the key driver for the industry. Drivers resorting to public transportation or carpools to trim down their commuting costs lowers the value proposition of a satellite radio subscription.
4. The alternatives are real
I have typically defended satellite radio relative to the booming popularity of portable media players like Apple's (Nasdaq: AAPL) iPod because they each aim at replacing a different aural appliance. Apple upgrades a car's CD player, while XM and Sirius take old-school terrestrial radio to a new level.
However, times they are a-changing. Some of the more popular Apple apps for iPhone and iPod touch devices are Internet radio streamers like AOL Music, Last.fm, and music discovery site Pandora. When you follow the bread crumbs of nascent trends like in-car Wi-Fi connectivity, municipal broadband coverage clouds, and smartphones that double as Internet radio streaming gadgets, it's hard not to temper one's expectations of satellite radio itself.
5. Separating the stock from the sector
I'm convinced that satellite radio will survive. The market obviously isn't so sure about the immortality of Sirius XM Radio shareholders. After all, antsy creditors may force Sirius into bankruptcy reorganization next year. It would likely wipe out the common-stock investors.
Even if a terrestrial radio heavy like Clear Channel or CBS (NYSE: CBS) makes a buyout play, it's one that will be considerably cheaper in bankruptcy court.
I don't see it getting that far. Filing for reorganization would clean out investors, but it might also be Raisin Bran to the colons of subscribers. "Most consumers -- including Sirius and XM's 18.6 million subscribers -- don't know the difference between Chapter 7 and Chapter 11 bankruptcy protection," I wrote last month. "Subs hear the word 'bankruptcy,' and they cancel in droves. Potential signups hear 'bankruptcy,' and there's no way they'll fork over the money for a satellite radio receiver."
In other words, Sirius has far more to lose than its common shareowners if creditors force the company into bankruptcy.
All of these hurdles explain why the stock has been marked down to four bits. Clawing its way out is a matter of clearing a few of the obstacles in the coming months.
I think Sirius can do it, but don't let that get in the way of the venom that Sirius bulls will tack on at the end of this piece.
Some other tales of low-priced stocks on the move:
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