SIRIUS XM Radio Inc. (SIRI) reported excellent financial results for the third quarter of 2010 that beat the Zacks Consensus Estimates. This was the combined results of a double-digit growth in revenue, significantly higher net addition to its pay-radio services, and a meaningful improvement in ARPU (average revenue per user).
The company, which was facing bankruptcy in 2009, is now steadily moving toward stability. After Comcast Corp. (CMCSA), SIRIUS XM is the second largest entertainment subscription services provider in the U.S. An improving U.S. auto sector and a rise in consumer spending will sustain SIRIUS XM’s near-term growth.
Improving U.S. economic conditions have resulted in the recovery of auto sector sales together with better-than-expected consumer spends prompting SIRIUS XM to present a rosy picture. The company has a very strong business relationship with original equipment manufacturers. SIRIUS XM owns an extensive satellite network covering the whole U.S. that provides audio content through over 130 channels.
Recently, Moody’s Investor Service upgraded the credit ratings of SIRIUS XM. The corporate family rating of SIRIUS XM was upgraded to “B3” from “Caa1” and the probability of default rating was upgraded to “B2” from “B3”. Overall, Moody’s rating outlook for SIRIUS XM is stable.
Nevertheless, we believe SIRIUS XM is still not out of danger. As on date, the growth of the combined entity (SIRIUS and XM) is far below their pre-merger level. SIRIUS XM’s business depends to a large extent upon automakers. The sale and lease of vehicles with satellite radios is the most important source of subscribers for both the XM and SIRIUS satellite radio services. Any turmoil in the U.S. auto sector will have disastrous effects on SIRIUS XM’s businesses.
We also remain concerned about the emergence of alternative technology of commercial Internet radio and therefore maintain our long-term Neutral recommendation. Currently, it is a short-term Zacks #3 Rank (Hold) stock.